Inheritance Tax Reform 2025: Optimization Strategies for Family Businesses

Inheritance tax is once again at the center of political debate. Following the Federal Constitutional Court's ruling in 2014 and several adjustments in recent years, further reforms are imminent that will particularly affect family businesses. While the details are still being discussed, clear trends are already emerging that entrepreneurs should be aware of and leverage for their succession planning.

At viaductus, we regularly support family businesses through complex succession processes and observe how inheritance tax regulations impact valuations and transaction structures. Those who recognize and correctly interpret the upcoming changes early can optimally align their succession strategy accordingly.

Overview of the Current Reform Approaches

The planned inheritance tax reform of 2025 aims for a fairer taxation of asset transfers. The core focus is the reassessment of relief provisions for business assets, which have so far enabled significant tax advantages. The Federal Ministry of Finance has already published initial key points announcing far-reaching changes for family businesses.

Particularly affected are the so-called relief deductions for business assets. These currently allow an exemption of up to 85 percent of the company’s value from inheritance tax if certain conditions are met. The reform proposes tightening these regulations and linking them to stricter criteria.

At the same time, personal exemptions will be adjusted. While these are to be moderately increased for direct descendants, the reform plans to tighten them for more distant relatives and transfers to non-family members.

New Valuation Approaches for Business Assets

Moving Away from the Simplified Income Approach

A central aspect of the reform concerns the valuation of business assets. The previously applied simplified income approach will be replaced by market-based valuation models. This means, concretely, that companies will be taxed closer to their actual market value in the future, which in many cases will lead to higher taxable bases.

This change has particularly strong effects on high-growth companies and innovative sectors. An IT company with high future expectations but low current earnings has so far benefited from low inheritance tax valuations. Going forward, market value will serve as the valuation basis, which can significantly increase the tax burden.

For practical purposes, this means entrepreneurs must have their business valuation professionally conducted in a timely manner and calculate realistic tax liabilities. Surprises during succession can quickly become existential threats.

New Criteria for Relief Rules

The relief rules for business assets will be tied to new criteria. In the future, a stronger distinction will be made between "genuine" family businesses with societal benefit and pure asset management or holding companies.

Companies must demonstrate that they make a substantial contribution to the national economy. This includes criteria such as jobs, training quotas, research and development, or regional roots. Pure real estate management or passive holdings will be significantly less favored than operational companies.

This innovation requires a strategic realignment for many family businesses. Those who have previously operated through complex holding structures must examine whether these are still tax-optimal or if simplifying the corporate structure would be more advantageous.

Tightened Wage Sum Regulation

The existing wage sum regulation will be significantly tightened. Previously, companies had to prove 400 percent of the original wage sum five years after the transfer to retain relief benefits. This regulation will be extended to seven years, and the required wage sum increased to 500 percent.

Impact on Personnel Planning

This tightening has far-reaching consequences for personnel planning in family businesses. Successors can no longer respond as flexibly to market changes if doing so would jeopardize the wage sum regulation. Automation or efficiency improvements that would normally lead to staff reductions are penalized for tax purposes.

This becomes particularly problematic in economically challenging times. While companies would normally reduce costs and cut staff, they must maintain the wage sum to avoid paying high inheritance taxes retroactively. This can lead to impossible conflicts of objectives in existential crises.

Strategic Adjustments Required

Companies must strategically reconsider their personnel policies. Long-term employment contracts, generous social benefits, and deliberate staff increases can be tax-advantageous, even if they are not economically optimal.

At the same time, new opportunities arise for employee participation. If the company must maintain a high wage sum anyway, profit-sharing or stock options can be attractive alternatives to pure salary increases.

Increases in Exemptions and New Thresholds

Adjustment of Personal Exemptions

The reform foresees moderate increases in personal exemptions. Children will receive €500,000 instead of the previous €400,000 exemption, spouses €600,000 instead of €500,000. These increases partially compensate for inflation in recent years but fall short of many family entrepreneurs' expectations.

Distant relatives will be significantly disadvantaged. Nieces and nephews will receive only €15,000 exemption instead of €20,000. For non-relatives, the exemption remains at €20,000, but tax rates will increase disproportionately.

Impact on Succession Models

These changes significantly influence the choice of the optimal succession model. While transfers to direct descendants remain favored, external succession solutions become less attractive tax-wise.

Family businesses without suitable successors within the family must seek alternatives earlier and more systematically. Management buy-outs or strategic sales will be taxed more heavily but can still be the better option if they achieve higher sale prices.

New Opportunities for Tax Planning

Optimizing Staggered Transfers

The reform creates new incentives for staggered transfers over several years. Since exemptions can be used anew every ten years, significant tax advantages can be achieved through clever timing strategies.

For example, a family business valued at €2 million can be transferred gradually over 20 years. With two children, €2 million can be transferred tax-free (2 x €500,000 exemption every 10 years). However, this requires very long-term planning and clear contractual arrangements.

Lifetime Gifts vs. Inheritance

Lifetime gifts are clearly preferred over inheritance. The reason is better predictability and the possibility to minimize valuation risks. With a gift, the company value can be determined at the time of transfer, whereas inheritance may include taxation of later value increases.

Gifts with usufruct reservation are particularly advantageous. The entrepreneur retains economic benefits but transfers ownership. This significantly reduces the taxable value of the gift and allows for gradual transfer of income to the next generation.

Holding Structures Under Pressure

Tightening for Asset Management Companies

The reform particularly targets complex holding structures previously used for tax optimization. Pure asset management and passive holding companies will largely lose their tax advantages.

This affects many traditional family businesses that have organized their operational activities within holding structures. A GmbH & Co. KG that only manages real estate or holdings will be taxed significantly higher than an operational manufacturing company in the future.

Strategic Restructuring

Many family businesses must fundamentally reconsider their structures. Simpler operational structures can be more tax-advantageous than complex holding constructions. This often requires extensive restructuring, which must take place well before the planned succession.

Mixed structures combining operational businesses with strategic holdings become particularly interesting. A craft business that simultaneously invests in innovative technologies can benefit from both worlds: operational tax advantages and strategic diversification.

International Aspects of the Reform

Cross-Border Successions

The reform increasingly takes international matters into account. German family businesses with foreign subsidiaries or international shareholders must observe more complex regulations. This particularly affects international buyers of German family businesses.

At the same time, new opportunities arise through double taxation agreements. Clever structuring can reduce tax burdens in cross-border successions but requires specialized advice.

EU Legal Restrictions

The reform must comply with EU legal requirements mandating equal treatment of EU citizens. This limits structuring options but also opens new opportunities for international structures.

Particularly interesting are holding structures abroad that can still offer tax advantages under certain conditions. Luxembourg and Switzerland remain attractive locations for family holdings if the structures are economically justified.

Impact on Different Types of Companies

Manufacturing Companies and Crafts

Traditional manufacturing companies and crafts benefit from the reform as they are classified as "genuine" companies with societal benefit. Their operational structures meet the new requirements for relief-eligible business assets.

Companies with a large workforce, their own training positions, and regional roots are particularly favored. A medium-sized machine manufacturer with 200 employees and established training programs meets all criteria for maximum tax advantages.

Service Companies and Consultancies

Consulting firms and other knowledge-intensive service providers face greater challenges. Their lower capital requirements and often smaller workforce can lead to less favorable tax valuations.

Successful strategies include building larger teams, investing in technology, and developing products rather than pure services. A consulting firm that develops and markets its own software will be taxed more favorably than a pure project consultancy.

Technology and Growth Companies

Innovative technology companies with high valuations but low current earnings are particularly affected. Market-based valuation can lead to substantial tax burdens that hinder growth.

Strategic responses include early involvement of the next generation, staggered transfers, and the use of earn-out structures that spread tax risk over several years.

Practical Optimization Strategies

Early Succession Planning

The most important strategy is early planning. Entrepreneurs should start systematic succession planning by age 50 at the latest. This creates flexibility for optimal structuring and avoids time pressure in critical decisions.

A professional business valuation every three to five years helps track value developments and initiate tax-optimal measures in time. Surprises in valuation can thus be avoided.

Optimization of Corporate Structure

Many family businesses can reduce their tax burden through structural optimizations. This starts with choosing the optimal legal form and extends to the strategic orientation of the company.

Particularly effective are measures that simultaneously improve operational efficiency and tax position. Investments in digitalization, employee qualification, or sustainable technologies can be advantageous both economically and tax-wise.

Liquidity Planning for Tax Liabilities

Even with optimal planning, significant tax liabilities often arise that must be financed. Companies should build liquidity reserves or prepare financing structures in good time.

Insurance solutions can help secure tax liabilities. Life insurance or special succession insurances create liquidity for unforeseen tax demands.

Legal Structuring Options

Family Companies and Foundations

Family companies and foundations are gaining importance as instruments of succession planning. They enable long-term binding of the company to the family while professionalizing management.

A family foundation can offer tax advantages, especially for larger companies. The one-time taxation upon transfer to the foundation can be more favorable than repeated inheritance taxes with each generation.

Strategically Designing Company Agreements

Well-thought-out company agreements can create significant tax advantages. Particularly important are provisions on profit distributions, voting rights, and succession arrangements.

Pre-emption rights, buyout clauses, and valuation provisions significantly influence tax valuation. A well-designed company agreement can reduce the taxable company value by 20 to 30 percent.

Testamentary Provisions

Testamentary dispositions must also be adapted to the new legal situation. Rigid inheritance sequences can lead to suboptimal tax burdens, while flexible executorships create optimization potential.

Particularly important are provisions for cases where planned successors fail or conditions for tax advantages are not met. Backup arrangements and flexibility clauses can avoid existential risks.

Transitional Provisions and Timing

Protection of Existing Plans

The reform provides transitional provisions for ongoing succession plans. Entrepreneurs who have already taken concrete steps may still benefit partially from the old regulations.

Crucial is proof that succession planning began before the reform announcement. Documented valuations, advisory contracts, or initial transfer steps can serve as evidence.

Optimal Timing for Transfers

The timing of transfers becomes even more important. Depending on company development, different points in time may be optimal. Lower valuations are possible before growth phases, higher exemptions can be used after successful years.

Especially for cyclical companies, transfers should occur in weaker phases when valuations are lower. This requires continuous monitoring of company development and flexible planning structures.

Advice and Implementation

Interdisciplinary Advisory Teams

The complexity of the new regulations requires interdisciplinary advice. Tax advisors, lawyers, management consultants, and M&A specialists must work closely together to develop optimal solutions.

Coordination between tax optimization and economic viability is particularly important. Purely tax-driven structures can be harmful in the long term if they impair operational flexibility.

Regular Review and Adjustment

Succession planning is not a one-time project but requires continuous adjustments. Changes in case law, company development, or family circumstances can render plans obsolete.

Annual reviews of the succession strategy with all advisors are recommended. Both tax and operational developments should be considered and plans adjusted accordingly.

Outlook and Further Developments

European Harmonization

In the medium term, European harmonization of inheritance tax is expected. This could lead to further changes in German regulations and open new structuring possibilities.

Family businesses should monitor these developments and design their structures flexibly. What seems optimal today may be outdated in a few years.

Digitalization of Tax Administration

Increasing digitalization of tax administration enables better controls and faster procedures. At the same time, new opportunities arise for digital applications and simplified processes.

Companies should digitize their documentation and systematically record all tax-relevant transactions. This facilitates not only compliance but also preparation for audits.

Recommendations for Family Entrepreneurs

The inheritance tax reform 2025 requires proactive action from all family entrepreneurs. Those who plan early and utilize the new opportunities can significantly reduce their tax burden while securing their company’s future viability.

Start with an honest assessment of your current situation. Have your company professionally valued and analyze the tax implications of various succession scenarios. Then develop a flexible strategy that considers both tax and operational aspects.

Early involvement of the next generation is particularly important. Discuss your plans and expectations openly and prepare potential successors systematically for their responsibilities. Successful succession is more than just tax optimization – it secures the long-term success of the family business.

Are you planning succession in your family business or considering buying a family business? Then leverage our expertise at viaductus for comprehensive advice on all aspects of business succession. Together, we develop a strategy that combines tax optimization with entrepreneurial success.

Further information on tax aspects of business succession can be found in our detailed articles on tax aspects and business asset exemptions.