Karlsruhe Hears Inheritance Tax Cases Over Two Days
In October 2026, the Bundesverfassungsgericht (BVerfG, Federal Constitutional Court) addressed key issues of inheritance tax law over two consecutive hearing days. The subject matter was, on the one hand, the abstract judicial review of statutes initiated by Bavaria concerning the nationwide uniform structure of inheritance tax and, on the other hand, a constitutional complaint regarding preferential treatment for business assets.
Both proceedings concern different legal approaches, but they share a common tax policy context: the question is the extent to which the legislature may differentiate in inheritance tax and which constitutional limits must be observed. Based on the current procedural status, decisions are expected only in several months, at the earliest in early 2027.
Bavaria’s Abstract Judicial Review of Inheritance Tax
Dispute over Nationwide Uniform Rules
On 12 October 2026, the Bundesverfassungsgericht heard the application for judicial review filed by the Free State of Bavaria under case no. 1 BvF 1/23. The hearing lasted around two and a half hours. The reporting judge in these proceedings is Federal Constitutional Court Justice Dr. Meßling.
Bavaria is challenging nationwide uniform rules on the valuation of real estate, allowances and tax rates. The focus is particularly on § 12(3), § 16(1) and § 19(1) ErbStG (Erbschaftsteuer- und Schenkungsteuergesetz, German Inheritance Tax and Gift Tax Act). In Bavaria’s view, this nationwide uniform structure lacks the constitutionally required necessity within the meaning of Art. 72(2) GG (Grundgesetz, German Basic Law) and Art. 105(2) GG.
In addition, the challenged provisions are measured, among other things, against Art. 3(1) GG, Art. 6(1) GG and Art. 14(1) and (2) GG. With these proceedings, Bavaria aims to open up scope for a partial regionalisation of inheritance tax. The application for judicial review goes back to a resolution of the Bavarian cabinet dated 23 May 2023; this also formulated the objective of enabling an average single-family home to be inherited tax-free.
Bavaria’s Arguments and Reactions from the Länder
Bavaria complains in particular that the inheritance tax allowances have not been adjusted since 2009, although property prices in particular have risen significantly since then. The Free State also points out that inheritance tax is a tax of the Länder, the revenue from which accrues entirely to the Länder. For 2025, nationwide inheritance tax revenue of EUR 13.3 billion was cited.
During the hearing, the Court appeared cautious, according to impressions there, towards Bavaria’s submissions. No other federal state supported the application. North Rhine-Westphalia expressly opposed the application.
An expert invited by the Bundesverfassungsgericht also referred to foreign experience with regionalised inheritance taxes. According to this, such a structure could create incentives for competition over the lowest possible tax rates. This argument was visibly directed against stronger regionalisation in the hearing.
Constitutional Complaint on Relief for Business Assets
Subject Matter of Proceedings 1 BvR 804/22
On 13 October 2026, the oral hearing on the constitutional complaint under case no. 1 BvR 804/22 followed. The Bundesverfassungsgericht had announced the date in press release no. 49/2026 of 30 July 2026; the accreditation deadline for media representatives ended on 7 October 2026 at 12:00 noon. In total, the hearing lasted almost six hours.
The complainant, a former bank manager, had inherited exclusively private assets from his aunt in 2018. The assets consisted essentially of a securities portfolio and real property with a total value of around EUR 250,000. This acquisition triggered around EUR 47,000 in inheritance tax, i.e. about 20 percent.
If, by contrast, preferentially treated business assets had been acquired, relief of up to 100 percent might have been available under certain circumstances. The complainant sees this in particular as a violation of the general principle of equality under Art. 3(1) GG. After having been unsuccessful before the Finanzgerichte (German fiscal courts), the constitutional complaint is specifically directed against an order of the Bundesfinanzhof (BFH, Federal Fiscal Court) of 17 January 2022, case no. II B 49/21.
Directly challenged are an inheritance tax assessment notice and the court decisions issued in relation to it. Indirectly, in addition to several provisions of the Erbschaftsteuer- und Schenkungsteuergesetz, the proceedings are also directed against a provision of the Bewertungsgesetz (German Valuation Act).
Standard of Review Applied by the Bundesverfassungsgericht
The constitutional review focuses on §§ 13a, 13b, 13c and 28a ErbStG in the version enacted by the legislature in 2016 in response to the judgment of the Bundesverfassungsgericht of 17 December 2014, case no. 1 BvL 21/12. At the time, the Court had not ruled out preferential treatment for business assets in principle, but had objected to aspects of the then existing structure.
The presiding judge of the First Senate, Court President Prof. Dr. Stephan Harbarth, made clear at the beginning of the hearing that inheritance tax affects many people and also touches upon their sense of justice. At the same time, he expressly limited the subject of the review to the question of whether the different treatment of acquirers of preferentially treated and non-preferentially treated assets is constitutionally justified.
Thus, the hearing was not about a general political assessment of inheritance tax. Rather, the decisive issue was whether the statutory relief for business assets, as compared with acquisitions of private assets, satisfies the requirements of the Grundgesetz.
Arguments in the Oral Hearing
Broad-Based Hearing in the Morning
For long stretches, the morning of the hearing had the character of a comprehensive consultation. In addition to the complainant, the Federal Government and the Länder, representatives from academia, associations, societies, foundations, parliamentary groups in the Bundestag, as well as companies and entrepreneurs, made statements.
Approximately 20 experts were heard during the hearing. According to consistent reports, unequal treatment of business assets and other assets was predominantly affirmed; however, it remained disputed whether and to what extent this unequal treatment can be constitutionally justified.
At the same time, it became clear that the empirical basis for individual assumptions regarding the effect of the relief rules did not appear consistently robust. Particularly on the question of whether preferential treatment for business assets is necessary to safeguard jobs, investment and innovation, the assessments presented sometimes differed widely.
Positions on Liquidity, Preservation of Businesses and Equal Treatment
The Federal Government continued to consider the legislature’s objectives viable. According to it, the preferential rules serve in particular to protect jobs, investment and innovative capacity. The Bundesverband der Deutschen Industrie pointed out that a high business value does not readily mean available liquidity.
From the perspective of the business side, an inheritance tax burden could result in the tax having to be financed through loans, sales of shares or additional distributions. This could impair the company’s investment capacity. Business assets are often tied up long-term in machinery, buildings or other operational structures.
The complainant countered that the relief rules do not only benefit acquirers who actually manage a business. Pure shareholders who essentially receive dividends may also benefit. In such a case, according to his account, it is not the business that is protected, but the assets of the acquirer.
At the hearing, the complainant also demanded that business heirs must pay at least 10 percent tax on the acquisition. The sale of business assets was also described by some parties as a possible way of financing the tax. Others countered that this could endanger the continued existence of operational structures.
Large Acquisitions and Needs-Based Relief Review in Focus
Criticism of § 28a ErbStG
In the afternoon, the discussion shifted in particular to large acquisitions and the associated structuring options. The focus was on the needs-based relief review under § 28a ErbStG. This provision concerns large acquisitions of preferentially treated assets and was introduced following the Bundesverfassungsgericht’s 2014 decision.
It was viewed critically that, even after the 2016 reform, preferentially treated assets worth billions can be transferred without a tax burden if the statutory requirements are met. The rule is linked to the acquirer’s ability to pay. By contrast, it does not directly examine whether the business and jobs are actually preserved.
The Senate expressly asked why the threshold of EUR 26 million is linked to the acquisition and not to the business, even though the relief is specifically intended to protect the business. It was also discussed that, beyond the payroll sum and the holding period, large acquisitions do not have to meet any additional requirements in order to benefit.
Structuring Options for Large Business Assets
The hearing also addressed structures by which the available assets of an acquirer may appear low. A representative of the citizens’ movement Finanzwende criticised in Karlsruhe that the needs-based relief review in place since 2016 invited people to “calculate themselves poor”.
The following constellations in particular were addressed:
- the involvement of family foundations,
- the appointment of minor heirs,
- the structuring of assets with a view to the valuation and transfer date.
These points were not treated as a conclusive assessment of individual structures. Rather, they served the constitutional review of whether the statutory rules, in their actual effect, still correspond to the purpose pursued by the legislature.
Discussed Alternatives to the Current Preferential Treatment
Deferral, Participation Models and Flat-Rate Taxation
In the course of the statements, alternatives to the existing system of preferential treatment for business assets were repeatedly addressed. Among other things, a long-term deferral of inheritance and gift tax instead of a complete tax exemption was mentioned, for example over a period of 20 years. Participation by the state as a silent partner was also mentioned as a conceivable approach.
It was argued against a deferral that even a deferred tax claim withdraws capital from the business. The burden is not removed thereby, but merely spread over time. It was also submitted that a deferral is bearable only at tax rates of up to around 10 percent; at higher tax rates, inheritance tax could, economically, have an effect similar to a significantly increased income tax rate.
Several experts expressed sympathy for a flat tax with a broad tax base and few exemptions. If such a reform were to be structured in a revenue-neutral manner, however, a tax rate more in the region of 15 percent than 10 percent was considered. It was also pointed out in this context that an inheritance tax burden can coincide with an already existing income tax burden of around 48.5 percent.
Further Models and Foreign Examples
Further considerations ranged from taxation based exclusively on earnings to a capital levy. Foreign models were also referred to during the hearing. Denmark was cited as an example of moderate taxation of business assets.
No model that clearly reconciles liquidity protection, equal treatment and tax revenue in equal measure emerged during the hearing. The choice between the conceivable regulatory concepts primarily lies with the legislature. The Bundesverfassungsgericht traditionally grants the legislature broad discretion in structuring inheritance tax.
At the same time, any legislative amendment is likely to be politically controversial. Even after the 2014 decision, it was not possible to reach a political agreement within the deadline set by the Bundesverfassungsgericht.
Possible Decisions and Practical Classification
No Clear Indication of Complete Rejection
How the Bundesverfassungsgericht will decide remained open after both hearing days. The Senate did not reveal any clear tendency. There was no express indication that the Court considers the concept of preferential treatment for business assets as a whole to be unconstitutional.
It therefore remains conceivable that the Court will once again approve the relief concept in principle, but require improvements for large acquisitions. Such improvements could concern, for example, the amount of the EUR 26 million threshold, its structure as a business-related threshold or additional requirements for preferential treatment. It is also possible that the Court will assess individual rules differently.
The decisions in both proceedings are expected to be delivered only in several months. In 2014, the judgment of the Bundesverfassungsgericht was issued around five months after the oral hearing.
Legal Situation Until the Decision
Until a decision is issued, the current law continues to apply unchanged. If the Bundesverfassungsgericht objects to the existing provisions, various forms of decision are possible. For example, the Court may issue a declaration of incompatibility with an order that the provisions continue to apply for a limited period, or declare individual provisions no longer applicable with immediate effect.
New legislation by the legislature with effect for certain cases from the date of pronouncement of the judgment may also be considered, insofar as the Bundesverfassungsgericht permits this. The specific consequences will depend on the operative part of the judgment and on the reasons for the decision.
From a practical perspective, it would be reasonable to expect that, in the event of an adjustment, the legislature would also address further application issues in inheritance tax law that have been known for some time. These include, among other things, the demarcation of administrative assets in the case of real estate, preferential treatment for residential property companies and hotels, the retention rules, the reinvestment clause and the tax exemption for the family home.
Frequently Asked Questions
When will the Bundesverfassungsgericht decide on inheritance tax and relief for business assets?
A decision in proceedings 1 BvF 1/23 and 1 BvR 804/22 is expected only in several months, at the earliest in early 2027. Until pronouncement, the current legal situation remains applicable unchanged.
What is the issue before the Bundesverfassungsgericht regarding the needs-based relief review under § 28a ErbStG?
§ 28a ErbStG concerns large acquisitions of preferentially treated business assets and is linked to the acquirer’s ability to pay. The Bundesverfassungsgericht is examining whether this structure justifies the unequal treatment compared with acquirers of non-preferentially treated assets.
What practical consequences can the Karlsruhe inheritance tax proceedings have for business heirs?
Depending on the decision, business heirs may face changes regarding preferential treatment for large business assets. Legislative improvements to thresholds, requirements or the review of the need for relief are possible in particular.
Tax Law Advice on Inheritance Tax Matters
The hearings in Karlsruhe show that inheritance tax stands at the intersection of wealth succession, business continuity and constitutional requirements. Particularly in the case of larger assets and corporate shareholdings, the legal and tax framework conditions can have a considerable influence on the structuring of succession. MTR Legal Rechtsanwälte supports companies, investors and high-net-worth individuals in tax law matters; further information is available at Legal advice in tax law.
