Inheritance tax reform 2025: constitutional developments in Germany and a comparison with Italian succession tax law. By Attorney Alessandro De Maria.
The debate on a "fair" inheritance and gift tax has gained significant momentum in 2025. It is being driven, on the one hand, by the fiscal situation and the associated search for sustainable sources of revenue and, on the other, by proceedings pending before the German Federal Constitutional Court in Karlsruhe, the outcome of which, politically expected for autumn 2025, could once again force the legislature to amend the law. Substantively, the spectrum of proposals ranges from selective adjustments, such as minimum taxation for large business assets or longer retention periods, to systemic changes such as a flat tax, an idea that briefly found support even within political parties, but was ultimately not incorporated into electoral or party programmes. The debate is underpinned by current assessment figures: in 2024, taxable transfers amounting to approximately EUR 64.7 billion were recorded, resulting in EUR 13.3 billion in inheritance and gift tax revenue. This confirms the central role of allowances and exemptions in the real tax burden. This constellation explains why distributive-policy considerations and location-based economic concerns both shape current reform discussions.
I. Political and constitutional starting point
At the centre of the current dispute lies the unequal treatment of recipients of private capital and real estate assets compared with privileged business assets. One reason for the debate is a constitutional complaint by an heir who inherited a securities portfolio and claims to be disadvantaged in comparison with the generous exemption rules for business property; it is speculated that the Federal Constitutional Court may render a decision as early as 2025. Such a ruling could, as in 2014, have consequences far beyond the immediate case. At that time, the Court held that the privilege for business assets in its previous form was partly incompatible with Article 3(1) of the Basic Law and set deadlines for legislative reform; this led to the reform effective from 1 July 2016, which reorganised the exemption architecture, including retention requirements, payroll thresholds and needs tests in very large transfers. Against this background, the politically communicated prospect of a 2025 judgment increases pressure to act, especially since fiscal considerations linked to budget financing are also shaping the agenda and amendments to inheritance tax law regularly require Bundesrat involvement.
At present, two main directions compete in the political sphere: a systemic shift towards a uniform flat tax of around 10 per cent, combined with the abolition of almost all exemptions, including the tax exemption for the owner-occupied family home, and incremental adjustments within the existing system, such as longer retention periods, minimum taxation for large business assets and stricter treatment of particularly generous privilege regimes. The flat-tax model briefly found sympathy within parts of the government, but, given the redistributive effects it would entail, especially for business heirs, it was not included in the programme for the 2025 federal election. The CDU/CSU currently remains cautious and points to risks for Germany as a business location and for employment; at the same time, the political difficulty of justifying a broad relief for wealthy private transfers is widely acknowledged. By contrast, the coalition partner appears more open to a systemic shift: proposals under discussion include effective minimum taxation for large business assets, including asset-holding family foundations, and concepts such as a lifetime allowance or inheritance cap, which would replace the periodic use of tax-free allowances on a ten-year cycle and would tax acquisitions above that level more consistently. Overall, consensus remains uncertain, not least because the idea of regionalising inheritance tax still finds little support at the federal level.
The empirical basis of the debate underscores the limited fiscal importance of the tax, but also shows how strongly allowances and exemptions shape its distributive effect: in 2024, taxable acquisitions of EUR 64.7 billion were assessed and EUR 13.3 billion in inheritance and gift tax was levied. These figures explain why reform proposals focus less on a mere rate increase than on the architecture of exemptions, while still taking political feasibility into account, especially in relation to the family home privilege and business succession.
II. Current law in Germany
The starting point for inheritance tax liability is the classification of the acquirer into one of the three tax classes under section 15 of the German Inheritance and Gift Tax Act (ErbStG). Tax Class I includes spouses and registered partners, children, including adopted and stepchildren, and further descendants such as grandchildren and great-grandchildren; it also includes parents and grandparents, though only in cases of inheritance upon death. Tax Class II covers siblings, nieces and nephews, children-in-law, parents-in-law and stepparents, as well as divorced spouses or former registered partners; parents and grandparents fall into this class in the case of inter vivos gifts. Tax Class III finally covers all other acquirers, such as distant relatives, unmarried partners, friends or legal entities. From a doctrinal perspective, it is important that the tax class determines only the tariff; the amount of the personal allowances is governed independently by section 16 ErbStG.
The personal allowances under section 16 ErbStG first grant a tax-free basic amount. Spouses and registered partners benefit from EUR 500,000, children, including adopted and stepchildren, as well as grandchildren where the parent has predeceased, from EUR 400,000, while grandchildren whose parents are still alive receive an allowance of EUR 200,000. Parents and grandparents in cases of inheritance upon death receive an allowance of EUR 100,000; all other acquirers receive EUR 20,000. Gifts from the same donor to the same acquirer are aggregated over a ten-year period; only after that period does the allowance renew.
The progressive tariff under section 19 ErbStG applies to the taxable acquisition remaining after deduction of the allowance. The range depends on the tax class: in Class I, the rates range from 7 per cent to 30 per cent, in Class II from 15 per cent to 43 per cent and in Class III from 30 per cent to 50 per cent; the concrete level depends on the amount of the taxable acquisition.
A separate objective exemption is provided by section 13(1) nos. 4b and 4c ErbStG for the family home. Acquisitions upon death by spouses, registered partners and children are tax-exempt if owner-occupation is continued; for children, the exemption is generally limited to 200 square metres of living space. The exemption is subject to a ten-year retention period: if owner-occupation ceases during this period, for example through sale or letting, the exemption generally falls away retroactively.
Business assets, finally, benefit from exemption regimes in the form of the standard exemption of 85 per cent and the optional exemption of 100 per cent, both subject to strict conditions, including retention periods, payroll requirements and restrictions on administrative assets. For very large transfers, tapering and needs-testing mechanisms apply. From around EUR 26 million, the exemption begins to decrease, and from around EUR 90 million a needs test regularly becomes decisive. Practice in this area is shaped by complex valuation issues, extensive documentation requirements and the risk of clawback taxation in the event of non-compliance.
As a result, spouses and children in Tax Class I generally benefit from relatively high allowances and the most favourable rates; in inheritance cases this is supplemented by the possibility of the family home exemption. Grandchildren receive either EUR 200,000 or EUR 400,000 depending on whether their parent has predeceased, and also fall into Class I. By contrast, siblings, children-in-law and comparable acquirers in Class II face low allowances, generally EUR 20,000, and medium rates, so that early lifetime planning, such as staged gifts or transfers with reserved usufruct, merits particular consideration. For all other acquirers in Class III, low allowances are combined with the highest rates, which increases the need for planning. In business succession, exemption regimes may result in substantial relief, but their condition-based structure requires sufficient lead time and precise structuring.
III. Current law in Italy
Italian inheritance tax, imposta di successione, unlike the German system, works with fixed rates and personal allowances determined solely by the degree of kinship. For spouses and relatives in the direct line, especially children, the rate is 4 per cent on the value exceeding an allowance of EUR 1 million per beneficiary. Siblings are taxed at 6 per cent with an allowance of EUR 100,000. More distant relatives up to the fourth degree and certain relatives by marriage are taxed at 6 per cent without an allowance, and all other acquirers at 8 per cent without an allowance. In cases of severe disability within the meaning of Article 3(3) of Law No. 104/1992, the allowance is increased, irrespective of kinship, by EUR 1.5 million, so that inheritance tax applies only to the value exceeding that amount. These parameters are well established in the practice of the Agenzia delle Entrate.
Of particular practical importance is the fact that, in addition to inheritance tax itself, mortgage tax and cadastral tax are always due where estate assets include real property. Without relief, they are levied proportionally, typically at 2 per cent for mortgage tax and 1 per cent for cadastral tax of the taxable value, each subject to a minimum of EUR 200. If the prima casa conditions are met, meaning the first-home or principal-residence criteria on the side of the acquirer, both taxes are levied only as fixed amounts of EUR 200 each. This fixed-amount solution is expressly recognised in administrative practice and also applies in inheritance cases to one privileged property. For legal planning, this means that even before estate administration begins, one must verify which beneficiary fulfils the prima casa criteria in order to limit mortgage and cadastral tax to EUR 200 plus EUR 200. Certain categories of assets, such as specific life insurance benefits or special protection regimes, follow special rules in Italy; their treatment depends on the product type and legal basis and should be verified case by case. For the fundamental parameters, however, namely rates, allowances and mortgage and cadastral tax including prima casa relief, the principles outlined above remain decisive.
Systematically, the two legal orders therefore differ considerably: Germany combines progressive tariffs with differentiated personal allowances and objective exemptions, most notably for the family home under strict owner-occupation requirements, while Italy provides for linear rates with generous allowances for close relatives; in return, additional acquisition taxes are levied on real estate, although these can be greatly reduced through the prima casa privilege.
IV. Transnational taxation
The location of individual estate assets, such as a property situated in Italy, does not in itself determine German inheritance tax liability. The decisive factor is first the personal connecting factor: if at the time of death either the deceased or the acquirer has resident status in Germany, namely residence or habitual abode, unlimited tax liability applies and therefore, in principle, worldwide taxation of the entire acquisition, regardless of the location of individual assets. Only if neither the deceased or donor nor the acquirer has resident status does limited tax liability arise; in that case only so-called domestic assets are subject to German inheritance tax, an exhaustive statutory list under section 121 of the Valuation Act, for example German real estate or German business assets. Double taxation in cases of unlimited liability may be mitigated through crediting foreign inheritance tax if the conditions of section 21 ErbStG are met, including temporal congruence and the location of the relevant assets in the foreign state concerned. The civil-law rules on jurisdiction and choice of law under the EU Succession Regulation remain unaffected; they coordinate the succession statute, not taxation.
V. Foresight instead of surprise
Use allowances strategically. Lifetime transfers only achieve their effect within the statutory framework. Multiple transfers from the same donor to the same recipient are aggregated over a ten-year period; only after that period do the personal allowances renew. In planning terms, this regularly creates a preference for staged gifts rather than a single large transfer, with volumes, timing and aggregation effects, including tariff progression, to be modelled in advance.
Structure the family home correctly. The family home exemption is a powerful, but strictly conditional, privilege. It applies in inheritance cases in favour of spouses, registered partners and, in principle up to 200 square metres, children. Its core requirement is continued owner-occupation, and if this ceases within ten years the exemption is generally lost retroactively. Strategically, one must therefore decide early whether the desired result is more safely and efficiently achieved through inheritance or through a lifetime transfer, possibly combined with reserved usufruct; in both variants, use, surface area and documentation must be managed consistently.
Place Italian real estate properly. In estates involving Italian real property, mortgage tax and cadastral tax substantially shape the initial liquidity burden. Without relief, 2 per cent and 1 per cent respectively, each with a minimum of EUR 200, are due; if at least one beneficiary fulfils the prima casa conditions, both taxes apply only as fixed amounts of EUR 200 each. In planning practice, this means verifying prima casa eligibility at an early stage and structuring the allocation of the property accordingly. Given the self-assessment regime introduced from 1 January 2025, deadline and process management must also be handled with particular care.
Think about business succession in terms of time. The exemption architecture for business assets is tied to conditions, in particular retention periods, payroll obligations and quotas relating to administrative assets. For large transfers, tapering and needs-testing mechanisms apply, roughly from EUR 26 million and EUR 90 million respectively, which require early and fine-grained planning. Company valuation, prior transfers, the corporate-law involvement of co-shareholders and the documentation of compliance requirements need several months of lead time, especially because reforms can take effect at short notice.
Integrate cross-border situations. In cross-border cases, civil-law and tax-law connecting factors diverge. The EU Succession Regulation coordinates jurisdiction, applicable law and the European Certificate of Succession, but not taxation. Taxation remains within national systems, whether through credits, exemptions or double-tax treaties. The practical consequence is a two-step analysis followed by integrated adjustment: first, the private-law succession statute, including any choice of law, and second, the tax consequences in the state of location and the state of residence, especially the conditions for tax credits, in order to avoid double taxation and make liquidity predictable.