In a decision released on 31 January 2007, the German Constitutional Court (Bundesverfassungsgericht) ruled that the current German real estate gift and inheritance tax regime is inconsistent with fundamental principles of equality and ordered the legislature to take remedial action by the end of 2008, at the latest.

German gift and inheritance tax law applies uniform tax rates to all asset classes, but because of different valuation methods currently only 50 to 70 percent of a property's market value is subject to taxation, compared to 100 percent in the case of securities and other liquid assets. Following the Constitutional Court's decision, real property will now be taxable at full market value.

The Constitutional Court pointed out that the legislature may grant tax exemptions, for example, for owner occupied residential properties, but it is unlikely that this will significantly reduce the amount of gift and inheritance tax levied on real estate portfolios that will be transferred in the future.

Because the legislature may amend the German Gift and Inheritance Tax Act at any time before 1 January 2009, time is of the essence for property owners who are considering transferring property within their families. Once the amendment becomes effective, property owners may just as well sell their property and bequeath more liquid assets, thus further fuelling the German property market.

If you have questions about these changes to the German gift and inheritance tax, please contact Thomas Busching or Jan Sudmeyer. If you would like more information about any aspects of European real estate law, please contact one of the Squire Sanders lawyers listed in this Alert.