Inheritance Tax: Bavaria Sues for Higher Exemptions
The 2022 Annual Tax Act, enacted at the federal level, establishes the basis for determining property values for inheritance tax purposes. The law defines the determination and application of real estate interest rates and management costs. In addition, regional factors have been introduced to account for the difference in costs between the national average and regional construction cost levels.
Bavaria Files Motion for Abstract Judicial Review
In many cases, the new regulation results in an increase in inheritance tax costs. Due to rising real estate prices, the tax relief provided by exemptions in inheritance and gift tax is thereby reduced. The State of Bavaria views this as a backdoor tax increase. At the end of 2022, Bavaria decided to file a lawsuit with the Federal Court of Justice regarding this matter. The so-called “application for abstract review of legal norms” by the State of Bavaria was approved at the meeting of the Council of Ministers on December 20, 2022. It is currently being drafted. Bavaria’s goal is to secure an increase in inheritance tax exemptions. Bavaria has been advocating for this for years. According to Bavaria’s Finance Minister Albert Füracker, the reason is the massive rise in property prices. This places heirs of residential properties in financial difficulty and has negative effects on the rental housing market. The key criticism of the legislature is that inheritance tax exemptions must be based on the values of average single-family homes. However, these values have risen drastically in recent years, yet the exemptions have not been adjusted to reflect this increase in value. Bavaria’s revenue from inheritance and gift taxes illustrates this: it was still around one billion euros in 2009 and rose to over 2.5 billion euros in 2021.
Practical implications
For property owners who are considering, for example, making a gift, the conclusion from current developments might be: It is better to wait a little longer until Bavaria’s proposal has been finalized. This way, an appeal can be filed after receiving a notice determining the property value or a gift tax assessment. However, it remains to be seen to what extent Bavaria’s proposal will have the desired effect or when the Federal Constitutional Court will rule on the matter. Those who can be patient should do so.
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