Inheritance and Gift Tax on Business Assets

Do you have to pay inheritance tax on a business that has been inherited or gifted?

In principle, yes. Like any other assets, business assets are subject to inheritance and gift tax and are valued at their fair market value on the valuation date. However, the personal allowances under Section 16 of the Inheritance Tax Act (€500,000 for a spouse, €400,000 per child, €200,000 per grandchild) are, however, quickly exhausted in the case of a valuable business, and the tax rate can reach up to 30 per cent even in the most favourable tax bracket, Tax Class I.

This is precisely where the exemption rules come into play. The legislator aims to safeguard the continued existence of businesses and the preservation of jobs, and therefore largely exempts productive business assets from this tax burden. Under the standard exemption, only 15 per cent of the exempt assets remain liable for tax, whilst under the optional exemption, tax on the exempt assets is waived entirely. The non-exempt portion and the personal assets transferred are taxed at the standard rate after deduction of the allowances.

A second mechanism applies to successors who are not immediate family members. If a person in tax class II or III – such as a nephew or a senior manager – acquires eligible business assets, the tax on this portion is effectively reduced to the level of tax class I via the relief amount under Section 19a of the Inheritance Tax Act (ErbStG). The preferential business assets are therefore subject to the same favourable tax rate, regardless of the degree of kinship.

Standard exemption or optional exemption: what is the difference?

The law provides for two models. The standard exemption under section 13a(1) of the Inheritance Tax Act (ErbStG) exempts 85 per cent of the inherited assets. It requires a holding period of, in principle, five years, as well as compliance with the relevant wage bill, which depends on the number of employees. Optional exemption under Section 13a(10) of the Inheritance Tax Act (ErbStG), on the other hand, can exempt the inherited assets in full, but in return ties the acquirer to the business for seven years and imposes higher requirements on the total wage bill.

In the case of the ‘option exemption’, there is also a separate limit for business assets: their share may not exceed 20 per cent. If this threshold is exceeded, full exemption cannot be achieved. In both models, the value threshold of 26 million euros must also be taken into account, above which special rules apply to large acquisitions.

The choice should not be based solely on the higher percentage. The ‘option exemption’ is suitable for an operations-focused business with low administrative assets and a successor who can commit to the longer-term restriction. If, on the other hand, there are uncertainties regarding staff development, the shareholding structure or the planned exit, the standard exemption may be the better choice. As the option is irrevocable, the decision should be made in conjunction with the tax calculation prior to the transfer.

What counts as ‘favoured assets’ and what as ‘administrative assets’?

It is not the entire value of the business that is exempted across the board, but only the core operational assets that qualify for the exemption. In particular, sole traders and shares in partnerships, holdings of more than 25 per cent in limited companies, and agricultural and forestry assets are eligible for tax relief. Administrative assets are then deducted from these assets.

Administrative assets primarily include assets that serve as capital investments rather than for business operations. These may include land let to third parties, minor shareholdings in limited companies, securities, art and collections, as well as surplus funds. Cash and receivables are only detrimental in the cash test to the extent that, after deduction of liabilities, they exceed the statutory threshold.

The law provides for several adjustments. For instance, a limited portion of net administrative assets is also eligible for relief above the ten per cent buffer. In the case of acquisition by reason of death, the investment clause may apply provided that the business assets are put to productive use within two years, as set out in a plan already in place. Business assets that were only transferred to the business in the last two years, however, remain excluded from the exemption.

The 90 per cent test is particularly strict. If this threshold is reached by the business assets, the exemption also ceases to apply to the remaining operational assets. For succession planning, this means that the asset structure must be analysed in good time and, where economically viable, adjusted prior to the transfer.

How does the wage bill scheme work?

The total wage bill justifies the tax relief as a measure to protect jobs. Anyone taking over a business under tax-favoured conditions is expected to retain the employees. For this reason, the total wages paid must not fall below a minimum threshold during the retention period. This threshold is calculated on the basis of the initial wage bill at the time of the transfer.

Under the standard exemption, this minimum wage bill is 400 per cent over a period of five years; under the optional exemption, it is 700 per cent over a period of seven years. Small businesses are given some leeway, as individual redundancies there immediately affect the ratio. Businesses with up to five employees are completely exempt. For those with six to ten employees, the requirement drops to 250 per cent (standard exemption) or 500 per cent (optional exemption), and for those with eleven to 15 employees, to 300 per cent or 565 per cent respectively.

If the business falls short of the minimum wage bill at the end of the period, the exemption is not lost entirely, but only on a pro rata basis. The exemption deduction is reduced in proportion to the extent to which the actual wage bill falls short of the required amount. As even cyclical staff reductions can consequently lead to a higher tax bill retrospectively, a wage bill forecast is an essential component of succession planning – particularly for businesses just above the employee thresholds.

What happens if the purchaser breaches the retention period?

The tax exemption does not constitute a definitive grant, but rather a conditional exemption. If the purchaser sells the business, essential business assets or the shares acquired within the holding period of five or seven years, back-taxation will apply in accordance with Section 13a(6) of the Inheritance Tax Act. The same applies if the business is wound up or if excessive withdrawals are made that erode the business’s assets.

The legal consequence is calculated on a pro rata basis. The tax relief is forfeited only for the years of the holding period that have not yet elapsed. For example, someone who sells after four out of five years does not therefore lose the entire relief, but around one-fifth of it.

This makes the time limits predictable, but does not alter the fundamental problem: a successor who wishes or is obliged to part with the business at an early stage should be aware of the tax consequences before accepting the preferential transfer. In legal practice, provisions in the articles of association and, where appropriate, fallback clauses are used as accompanying measures to ensure that the retention of the tax relief is not made dependent solely on the good conduct of an individual purchaser.

What applies to major acquisitions worth over 26 million euros?

Where the value of the inherited assets exceeds 26 million euros, the flat-rate exemption ceases to apply. In 2014, the Federal Constitutional Court ruled against the unlimited exemption for large estates. The legislature subsequently introduced two options for the beneficiary.

Under the phasing-out model set out in Section 13c of the Inheritance Tax Act (ErbStG), the tax relief is reduced as the value increases. For every 750,000 euros above the 26 million euro threshold, it decreases by one percentage point. From an acquisition value of 90 million euros upwards, the exemption allowance is completely eliminated. The benefit therefore diminishes gradually, rather than ending abruptly at the threshold.

The exemption needs test under Section 28a of the Inheritance Tax Act (ErbStG) takes a different approach. It exempts the tax on the beneficiary’s assets if the beneficiary is unable to pay it from their available assets. In this context, 50 per cent of the sum of the co-transferred, non-exempt assets and the acquirer’s existing personal assets is deemed available. Anyone with substantial private assets must therefore use half of them before the exemption takes effect. For wealthy acquirers, the means test is therefore often less favourable than the phasing-out model; for successors with limited assets to large businesses, however, it is a lifeline.

Family businesses with typical retention clauses have a separate instrument at their disposal. If the articles of association contain restrictions on withdrawals, disposal and compensation which remain in force for two years prior to and twenty years following the transfer, Section 13a(9) of the Inheritance Tax Act (ErbStG) grants an advance deduction of up to 30 per cent on the value of the business – even before the actual exemption takes effect. This reduces the tax base, meaning that a large acquisition may, for tax calculation purposes, fall below the 26-million threshold. However, the long retention period requires that the clauses be enshrined in the contract at an early stage and on a permanent basis.

Will the exemption for business assets be reformed or abolished?

This is the weak point in the plans. The current rules are already the result of a correction: in its judgement of 17 December 2014 (1 BvL 21/12), the Federal Constitutional Court declared parts of the business assets exemption to be incompatible with the principle of equality. The reasoning behind this decision was that the wage bill exemptions went too far and also benefited companies that did not require subsidies.

The legislature responded with the Inheritance Tax Adjustment Act 2016 by revising Sections 13a to 13c and 28a of the Inheritance Tax Act (ErbStG). The Act applies retrospectively to acquisitions from 1 July 2016 onwards. The Federal Finance Court most recently confirmed, in its judgement of 20 November 2025 (II R 7/23), that this retroactive effect was valid and that there was no loophole in inheritance tax law.

However, this does not settle the matter. Another case is currently pending in Karlsruhe. Under case number 1 BvR 804/22, the Federal Constitutional Court is examining whether the exemption of business assets is compatible with the principle of equality, given that business assets are often transferred almost tax-free, whilst private assets are subject to the full tax burden. A ruling is expected before the end of 2026. If it goes against the current rules, this could have far-reaching consequences for the existing privileges.

The political debate is running in parallel. In early 2026, the SPD parliamentary group presented a proposal designed to replace the exemption with a business assets allowance of 5 million euros and a twenty-year deferral of tax.

Business organisations are opposed to this: the DIHK, for instance, advocates retaining the exemption rules and warns against placing a burden on family businesses and jobs. The CDU/CSU side wishes to await the Karlsruhe ruling first.

Anyone planning a handover in any case should structure their arrangements in accordance with current law to secure the existing relief whilst, at the same time, keeping the structure flexible enough to respond to any changes in the legal situation.