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Double burden imposed by inheritance tax and income tax on heirs of interest claims is constitutional

Press Release No. 29/2015 of 13 May 2015

Order of 07 April 2015
1 BvR 1432/10

In an order published today, the Second Chamber of the First Senate of the Federal Constitutional Court did not admit for decision a constitutional complaint that challenged the double burden imposed by inheritance tax and income tax on heirs of interest claims because the complaint had no prospect of success. Since the legislature possesses the authority to base taxation on typification and generalisation (Typisierungs- und Pauschalierungsbefugnis), it is compatible with the principle of equitable imposition of tax burdens (Gebot der steuerlichen Lastengleichheit, Art. 3 sec. 1 of the Basic Law, Grundgesetz – GG) not to take into account future income tax when assessing inheritance tax.

Facts of the Case and Procedural History:

The complainant was the universal heir of his brother, who had died in 2001. The inheritance of 15 million DM included interest claims of about 190,000 DM that had already accrued, but were only receivable in 2002. In 2002, the tax office fixed the complainant’s income tax on capital income relating to those interest claims at about 50,000 €; the inheritance tax at about 4.8 million DM. When determining the total value of the inheritance under inheritance tax law, the tax office used the interest claims’ nominal value. The burden on the interest claims resulting from deferred income tax was not taken into account. The claimant’s petition before the Finance Courts to reduce the inheritance tax by about 16,000 € due to the deferred income tax remained unsuccessful.

Key Considerations of the Chamber:

1. The right of inheritance under Art. 14 sec. 1 GG is not violated by the accumulation of income and inheritance tax to the claimant’s disadvantage in this case. With a total tax burden of about 4.8 million DM compared to an inheritance value of at least 15 million DM, it is by no means economically pointless to bequeath these assets. The allegedly excessive tax burden on accrued interest claims, challenged by the claimant, could only be relevant in the absolutely atypical case of bequeathing interest revenue separately. Such a situation can easily be avoided by the deceased through specific arrangements. In view of the legislature’s typification authority, no special regime has to be provided for such a case.

2. In addition, Art. 3 sec. 1 GG is not violated if the income tax incurred in the year after the inheritance on the interest claims accrued until the bequeather’s death is not taken into account when the inheritance tax is determined. This does not amount to a general rule with regard to the relationship between inheritance and income tax and the problem of deferred income tax burden. For at least with regard to interest claims belonging to the inheritance, the legislature’s competence to use typification and generalisation justifies not to take into account later income tax in determining the inheritance tax.

a) The Federal Constitutional Court has often accepted the aspect of facilitating administrative tasks as justifying the use of typification and generalisation. Tax law usually concerns standard situations in economic life. In order to be practicable, tax law has to use standard situations to all of which it attaches the same fiscal consequences and, in this context, has to disregard the specificities of a single case to a great extent. However, the economically inequitable effect on the taxpayers may not surpass a certain degree. Rather the fiscal advantages of typification have to be adequately balanced with the inequality of tax burdens necessarily entailed with typification. Furthermore, the legislature may not choose an atypical case as basis for legal typification, but, in line with reality, the standard has to be the typical case.

b) Those requirements are met.

According to the recent jurisprudence of the Federal Finance Court, when the inheritance value income is determined, tax liabilities will be taken into account as inheritance liabilities if all taxable events happened during the bequeather’s lifetime. Thereby, the legislature’s decision reflects the typical case of a deceased having already been taxed on the assets belonging to the inheritance, or of the incurrence of income tax liability being merely subject to the expiration of the assessment period. If the legislature does not specifically provide for a special rule for the case that the inheritance includes claims that will only be taxable under income tax after they accrue to the heir, this constitutes, as such, a generalisation inherent to any legal regulation.

This generalisation simplifies the tasks of public authorities when assessing the inheritance tax due, as it is not necessary to determine the future income tax burden. Such a determination is particularly difficult in cases in which not all taxable events happened during the lifetime of the deceased. On the bequeather’s day of death, the income tax due is not clear yet, as it depends on other future events like other income of the heir. If the income remains below the threshold of the tax exempt amount, there will be no income tax burden at all.

These simplification effects are adequately balanced with the inequality of the tax burden [that the legislature’s approach] necessarily entails – at least in the context of interest claims, which are the sole object of these proceedings. The case of the complainant shows that very big inheritances with a high number of securities and accruing interest claims may, taken by themselves, lead to a high additional burden. However, when assessing the degree of inequality, this additional burden has to be compared to the total tax burden. This burden – amounting to about 0.65 % – is negligible here.