Inheritance Tax Reduction Proposed

In a move aimed at easing the financial burden on families in Bavaria, Bavaria's Minister-President Markus Söder (CSU) has proposed initiating a tax competition in Germany by lowering inheritance tax in Bavaria. However, his demand for regionalisation of inheritance tax faces opposition from Federal Chancellor Friedrich Merz, who sees no chance of realizing Söder's proposal, according to his statement on Monday.

Söder claims that family members in Bavaria are forced to sell their homes to pay inheritance tax. He believes that regionalisation would allow states to set their own rates, potentially mitigating this issue. Currently, no German federal states besides Bavaria have reduced or modified the inheritance tax.

The current tax-free maximums for heirs vary. For spouses and registered life partners, the maximum is 500,000 euros; for children, stepchildren, and grandchildren (if parents are deceased), it is 400,000 euros; for grandchildren (if parents are still alive), it is 200,000 euros; for great-grandchildren, it is 100,000 euros; and for all other heirs, regardless of direct kinship, it is 20,000 euros.

Reiner Holznagel, head of the Association of Taxpayers, agrees with Söder and believes that the low tax allowance forces many heirs to sell inherited properties. On the other hand, Marie-Christine Ostermann, president of the Association of Family Entrepreneurs, warns of a potential patchwork of varying rules and increased bureaucratic burden for companies with operations in multiple federal states if inheritance tax were a regional matter.

Inheritance tax is a regional tax regulated by federal law, and any amendment would have to be decided in the Bundesrat. The administration and collection of inheritance tax, as well as the revenues from it, currently flow to the states.

Söder suggests that inheritance tax is unfair, particularly in cases of business succession, crafts, and inheriting the parental home. He wants to raise the issue at the black-red coalition committee meeting on September 3, 2025. From a Bavarian perspective, Söder's proposal is understandable, according to Ostermann, when compared to Austria, which has no inheritance tax, creating a significant competitive disadvantage for companies in border regions.

An alternative to inheriting is donating, which can sometimes be beneficial from a tax perspective. However, Söder's plan for each federal state to handle increases or decreases in inheritance tax as they see fit faces political resistance and court challenges. Merz stated that they have other worries at the moment than dealing with tax political issues of this kind.

As the debate continues, it remains to be seen whether Söder's proposal for regionalisation of inheritance tax will be accepted, and if so, what implications it may have for families and businesses across Germany.