New regulation of inheritance tax

The first details of the new regulations on the preferential treatment of business assets for inheritance tax purposes are now known.

Following the ruling of the Federal Constitutional Court, the preferential treatment of business assets under inheritance tax must be fundamentally revised. Although there is no official draft legislation yet, many details of the changes planned by the Federal Ministry of Finance have already leaked out.

Originally, the Ministry of Finance had announced that it wanted to burden the economy as little as possible when implementing the ruling. But there is already sharp criticism of what has become known so far, because many see the planned changes as too restrictive. For example, the red-green state government of Baden-Württemberg would like to see more generous regulations for company heirs.

Changes to the inheritance tax are unavoidable in three respects. As things stand, the Ministry of Finance's plans look like this:

• Administrative assets: Instead of a flat-rate threshold of 10 % or 50 % for administrative assets, there is to be an asset-based approach in future. Accordingly, all assets that are used to generate more than 50 % of income at the time of acquisition will be eligible for tax relief. Debts are then to be allocated proportionately to the beneficiary and non-beneficiary assets.

• Payroll regulation: So far, the payroll regulation only applies to companies with more than 20 employees. This is too generous for the Constitutional Court. The ministry now wants to make the payroll regulation completely independent of the number of employees and instead base it on the value of the company. If the value of the company is less than EUR 1 million, the payroll regulation will not apply.

• Large-scale operations: Finally, the Federal Constitutional Court has demanded a special needs test for large companies. This is to be implemented via an exemption limit of EUR 20 million. If this exemption limit is exceeded within 10 years, the heir or donee must prove that he or she is personally unable to pay the inheritance tax immediately from non-business funds. For this purpose, he must spend up to 50 % of the available free assets.

The cabinet plans to approve the government's draft bill soon. The ministry therefore has little time left to fine-tune its draft. After that, it will be up to the Bundestag and Bundesrat to revise the bill.