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Law firm warns of UK impact from German IHT ruling

A court ruling in Germany making tax breaks and exceptions on inheritance for family businesses illegal may cause concern in the UK, a British law firm has warned.

A court ruling in Germany making tax breaks and exceptions on inheritance for family businesses illegal may cause concern in the UK, a British law firm has warned.

The Federal Constitutional Court in Germany ruled the 2009 Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetzes – ErbStG)as illegal and unconstitutional on 17 December. It maintained the special treatment it provides to some companies violates the principle of fair taxation.

Sally Ashford, legal directorat Charles Russell Speechlys, has cautioned that the decision “may cause owners of family-run businesses in the UK to look over their shoulder too.”

UK family firms, which rely on business property relief (BPR), could face strains from an inheritance tax (IHT)charge and be confronted with difficulties when passing on the business to the next generation.

Ashford added: “We know, from our clients’ experiences, that without proper planning and advice it is often difficult to raise large sums of cash at relatively short notice to pay unexpected IHT bills.”

“Unless the German Finance Ministry introduces new regulations, this decision could spell disaster for some of the smaller businesses in the Mittelstand,” she warned.

The new ruling could have dramatic consequences for German family businesses, which make up 92% of German corporations, employ over half of the country’s workforce and produce more than half of Germany’s economic output. 

Moreover family-owned firms could be placed in a disadvantaged position compared to competitors who do not face IHT bills.

However Mark Hastings, director generalof the UK's Institute for Family Business, is not perturbed by the prospect of such a ruling being effected in the UK.

He told CampdenFB: “Our governmentfully understands that BPR from inheritance tax maintains a level playing field between family businesses and other businesses, ensuring the family business sector can grow, flourish and continue to make its considerable contribution to jobs and GDP.  That’s why they are committed to keeping BPR in place.”

Hastings added that in fact the ruling in Germany “has been widely anticipated by the family business sector” in the country.

Small and medium-sized German companies have been given a deadline of June 2016 by the government to enable them to protect themselves and resolve inheritance issues before the ruling is enforced.

Hastings said that up until this deadline: “The mighty Mittelstand will be making it clear that, just like other businesses, family businesses should not pay a tax penalty on business transfer.  Indeed the ruling makes clear that it is constitutional to provide a tax exemption for family firms.  So it seems clear the debate will focus on refining some detail, rather than challenging the principle of exempting family firms from IHT.”

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