Germany’s proposed inheritance taxation law will tighten the requirements for family business inheritors and increase demand for inheritance planning services among HNW individuals.
However, uncertainty over the exact timing and details of the new deal on inheritance taxation is set to continue, following the Bundesrat’s rejection of the government’s proposal on July 8. Calls for stricter tax measures mean that any update to the law is now likely to be delayed at least until late 2016. The pressure to update the regulation follows from a Federal Constitutional Court ruling in 2014 which found that the current system is unfairly benefitting business owners in comparison to other taxpayers.
The German economy is dominated by family-owned SMEs that have traditionally paid lower inheritance tax, provided certain conditions such as retaining jobs have been met. Under the new legislation most family-owned companies will continue to be exempt from a large part of inheritance taxes, but the conditions will be tightened. It was originally proposed that tax exemptions would be reduced for companies worth more than €26m, and abolished for those worth more than €90m. However, it is likely that the updated proposal to be brought before the Houses of Parliament later in 2016 will include even tighter conditions than the original proposal.
As per our 2015 Global Wealth Managers Survey, German wealth managers forecast strong growth in demand for inheritance planning over the next two years. In addition to regulatory developments, demand will also be fueled by demographics. Our survey shows that 74.3% of German HNW investors are over 51 years old, with 33.2% being over 65. As the wealthy grow older, many will start thinking about the transfer of wealth to the next generation. Given that the largest share of German HNW investors are family business owners, it is not surprising that crafting succession plans is topical for many.
Wealth managers serving the German market should gear up their inheritance planning services and get ready for the intergenerational wealth transfer ahead, helping clients to navigate the changing regulatory environment.
By Katri Tuomainen, Wealth Management Analyst