Germany imposes higher inheritance taxes than others

In Germany, when business assets are subject to inheritance tax, exceptional rules apply. Criticism has been levelled at the payroll rule and the tax exemption requirement test. The Federal Constitutional Court is expected to rule on this issue in the near future. This is reason enough to take a comparative look at the situation abroad.

Munich, 4th September 2024. Germany taxes inheritances of business assets quite heavily compared to other countries. Germany has the highest burden when bequeathing assets to a spouse and the third highest when the heir is a child. This is the conclusion of an international comparison carried out by the economic research institute ZEW – Leibniz Centre for European Economic Research in Mannheim on behalf of the Foundation for Family Businesses.

Of the 33 countries analysed, 14 do not levy an inheritance tax at all. A further 12 countries exempt spouses and, where applicable, children from the inheritance tax. A total of 11 countries offer preferential treatment when heirs inherit companies in general or family businesses in particular. In 17 of the 19 countries with an inheritance tax, payment facilities (such as deferral or payment by instalments) are granted.

International comparison of regulations
This is the first time that an international comparison of inheritance tax regulations has been published in this rigour and scope, and is based on a simulation model developed at ZEW. The background to this is the intense debate on the role of inheritance tax in the tax system and how it should be structured. On the one hand, the focus is on generating tax revenue in the face of shortfalls in state budgets and, on the other, on ideas regarding a fair distribution of wealth.

Although the share of inheritance tax as a percentage of total tax revenue has risen sharply in Germany over the past 20 years, it recently stood at just 1.1 per cent. However, this is still twice as much as the OECD average. In most of the countries analysed, the tax has lost relevance or has been eliminated entirely.

Due to demographic trends and asset value development, experts in Germany expect German inheritance tax revenue to double to up to 14.6 billion euros by 2050. They estimate the total value of inheritances to be taxed at 290 billion euros.

The ZEW research team hypothesises that inheritance taxes can contribute to reducing absolute wealth inequality in the long term. However, it should be noted that inheritance tax influences the behaviour of economic entities, for example the investment propensity of company owners, the willingness of their spouses or children to take over the company or a decision to sell the company. The burden of inheritance tax can thus have an indirect effect on employment, wages or income from other types of tax.

Teaser image: Industrial zone ©iStock, 2024