The dispute concerns the distribution of powers between the federation and the Länder, and the court’s ruling will determine whether the tax remains uniform across the country. A decision on Bavaria’s challenge is not expected for several months.
What the Bavarian government is contesting
The rate of inheritance tax in Germany is the same across the whole country. The Bavarian government and the state’s Minister-President, Markus Söder (CSU), have criticised this system more than once and advocate the introduction of a regional inheritance tax. The dispute has now reached the Federal Constitutional Court. It is this court in Karlsruhe that may decide whether the federation is entitled to set the rules of the tax itself, or whether that right belongs to the Länder.
Last week, the court in Karlsruhe spent two and a half hours hearing Bavaria’s challenge in a so-called “abstract judicial review”. This is the term for reviewing a law’s compliance with the Basic Law. Such a challenge was brought by the state government, and the court must assess the law itself, without a specific dispute between individuals or organisations. The state government wants the senior judges to establish, in particular, whether certain provisions of the Inheritance and Gift Tax Act are unconstitutional for the very reason that the federation has no right to establish them.
Once again Söder defends the interests of VIPs
At the start of the hearing, the court’s president, Stephan Harbarth, recalled that in its earlier rulings the Federal Constitutional Court had already addressed more than once the limits that the Basic Law places on the legislator when calculating inheritance tax. In his words, the Bavarian government’s challenge again raises fundamental questions of constitutional law.
The Bavarian authorities are contesting three groups of provisions of the Act:
- the rules for valuing property;
- the amounts of the tax-free allowances;
- the tax rates.
In the Bavarian government’s view, the federation has no authority to adopt such provisions; this is a matter for the Länder. In addition, the challenge states that the rates and tax-free allowances are unconstitutional because they have not been adjusted for inflation. There is one more argument. The tax-free allowances, in Bavaria’s view, should take into account regional differences in property prices.
Bavaria’s Finance Minister: the road to Karlsruhe was unavoidable
Inheritance tax is a tax of the Länder, and all revenue from it remains with the Länder, Bavaria’s Finance Minister Albert Füracker (CSU) said on the eve of the hearing. Therefore, in his words, the Landtage must be able to exert substantial influence on the calculation of this tax.
Füracker said that the Bavarian government had for many years been pressing for a reform of inheritance tax at the federal level and in other Länder. “The tax-free allowances and rates have not changed since 2009, while property prices have in places doubled and even tripled,” he noted. As a result, the tax-free allowances have ceased to ease the tax burden, and the sharp rise in inflation amplifies this effect. In other words, an allowance that has remained unchanged since 2009 covers an ever smaller part of the value of the property, so heirs are taxed on a larger share of the inheritance.
“Bavaria wants to ensure that children can continue to inherit their parents’ house in future, and that the tax does not force them to sell it,” the minister stressed. According to him, despite these developments and numerous Bavarian initiatives, the federal legislator has not responded. “That is why the road to Karlsruhe became unavoidable for us,” Füracker concluded.
The position of the Federal Ministry of Finance
The Federal Ministry of Finance takes a different view. Its Parliamentary State Secretary Michael Schrodi stated that inheritance tax must be uniform across the country, not least to prevent tax competition between the Länder. In addition, this approach prevents some wealthier individuals from manipulating property prices in order to pay less tax when receiving an inheritance. Moreover, a fragmented legal framework would lead to considerable bureaucratic costs, the SPD politician warned.
How inheritance tax works
Inheritance tax is, as a rule, paid by anyone who receives property as a result of another person’s death. This may be cash, a house, a company, securities, jewellery or shares in businesses. The amount of tax depends on the degree of kinship and the value of the inheritance, and tax rates range from 7 to 50 per cent. The larger the inheritance and the more distant the relationship to the deceased, the higher the tax.
It is estimated that between 200 and 400 billion euros pass to new owners in Germany every year in the form of inheritances and gifts. In 2025, the state collected 13.3 billion euros in taxes on them. Comparing these figures, the tax amounts to roughly 3 to 7 per cent of the value of the property transferred. Although inheritance tax is regulated by federal law, all the revenue goes in full to the budgets of the respective Länder.
But Söder has long wanted to control the tax at the level of the Land. What advantages this would give him, any reader of ours can guess.
Plans of the federal government
In the CDU/CSU and SPD coalition, the parties agree that inheritance tax needs reform. There the common ground ends. The SPD would like to have started the reform long ago and is pushing the discussion forward, while the CDU and CSU intend to wait first for the Federal Constitutional Court’s decision. On Tuesday the court will hear another case on inheritance tax. This time the question is whether the broad tax reliefs for heirs of business assets comply with the Basic Law.
The SPD wants to close, in future, the loopholes through which large fortunes can be passed on almost without paying tax. The CDU and CSU reject these proposals. This proves what has been said above about Söder lobbying the interests of a certain stratum of society. But within the CDU/CSU bloc, too, there are disagreements on this subject, since Federal Chancellor Friedrich Merz (CDU) last year rejected Söder’s demands for a regional inheritance tax.
Federal Finance Minister Lars Klingbeil stressed on Sunday that it is unfair when fortunes of millions and billions of euros are often passed on almost without paying tax, while small inheritances are taxed at high rates at every turn. “Strong shoulders must bear more,” the SPD chairman reminded. According to him, the party has already submitted corresponding proposals. “As soon as the Federal Constitutional Court defines the legal framework, we want to implement them.”
Why this matters
The court’s ruling will determine who in Germany is entitled to set the rules of inheritance tax: the federation or the Länder. It also affects how the reform plans will develop, since in the CDU/CSU and SPD coalition they intend to wait first for the judges’ verdict. The court’s decision also determines whether certain highly placed individuals will be able to continue “optimising” their tax payments, or whether the law will be the same for all and they will not be able to avoid taxation. The outcome of Monday’s hearing and Tuesday’s proceedings will allow a judgement as to the direction in which the reform of inheritance tax may go.
Until the judges deliver their ruling, the parties’ positions remain unchanged. Bavaria insists on the right of the Länder to regulate the tax themselves, the federal government considers that it must be uniform across the whole country, and the coalition agrees that reform is needed but disputes whether to begin it now or after the court’s decision. It is now on the words of the judges in Karlsruhe that the further course of this dispute depends.
