Judgement on inheritance tax to be handed down - take advantage of last possibilities for action

The German Federal Constitutional Court yesterday announced that it will hand down its judgement on the issue of inheritance tax at 10.00 a.m. on Wednesday, 17 December 2014 (1 BvL 21/12) (Press Release No. 102/2014).

The proceedings essentially concern the applicable regulations of the German Inheritance Tax Act in force since 1 January 2009, according to which business assets are exempted to 85 % or even 100 % from inheritance or gift tax if the person acquiring the assets meets certain conditions for a period of five or seven years following acquisition. The German Federal Fiscal Court called this exemption rule into question and submitted it to the German Federal Constitutional Court for a preliminary ruling. The German Federal Constitutional Court made it very clear in a hearing held on 8 July 2014 that it sees the privileged treatment of business assets as being too extensive (cf. our news article of 09.07.2014).

How will the German Federal Constitutional Court decide on 17 December?

In its last decision on inheritance tax law, the court held that the regulations concerned were invalid but could still be applied during a transitional period and ordered the legislator to create a new constitutional regulation by 31 December 2008. This order led to the exemption regulations which have applied since 1 January 2009. In the event that court again issues a regulatory order, it has to be assumed that a new regulation will lead to a higher tax burden. It is not, however, ruled out either that the court will only overturn the exemption regulations and otherwise allow the German Inheritance Tax Act to continue to exist. From an inheritance tax perspective, this would be the worst possible case for asset transfers after 17 December 2014.

What does this mean for property succession?

Time is running out for possible arrangements in this respect. Anyone who wants to benefit from the possibilities offered by the German Inheritance Tax Act which still applies has to act now. Assets can still be transferred to the next generation or third parties (e.g. family trusts (Stiftung)) and gift tax avoided completely under bearable conditions. This above all applies for (family business) entrepreneurs. Private individuals, however, can – if the right arrangements in place – benefit from the regulations which still apply. It can also make sense to support the transfer of assets with additional arrangements, e.g. reserving a right of usufruct, which secures lifetime income and influence for the owner, whilst the assets are transferred without incurring any tax.