By decision of 7 November 2006, the Federal Constitutional Court declared the inheritance and gift tax unconstitutional – not because of the tax rate, but because of the assessment basis: real property was assessed at tax values that in some cases reached only 20 to 30 percent of the actual market value, while monetary assets were recorded at their full nominal value. The decision forced a complete reform of real property valuation and remains to this day the constitutional foundation for the right to prove a lower market value pursuant to § 198 BewG.

Facts and Underlying Proceedings

The decision was based on a referral by the Federal Fiscal Court (referral decision BFH of 22 May 2002 – II R 61/99). The BFH had considerable doubts about the constitutionality of § 19(1) ErbStG: inheritance tax imposed uniform tax rates on the value of the acquisition – yet the valuation of real property under the simplified income approach then in force (§§ 146 et seq. BewG old version) systematically resulted in tax values significantly below market value. The BFH found that the tax values of properties "in many cases reached significantly less than half, in some cases only 20% to 30% of the average value" on the real estate market – while monetary assets were recorded at their full nominal value and capital claims at their face value. This structural unequal treatment formed the core of the constitutional referral question.

Operative Provisions

The Federal Constitutional Court (First Senate) declared § 19(1) ErbStG, in all versions in force to date, incompatible with Art. 3(1) of the Basic Law (principle of equality). The existing law remained applicable pending a new regulation by the legislature, at the latest until 31 December 2008. The Inheritance Tax Reform Act entered into force on 1 January 2009 (Federal Law Gazette I 2008, p. 3018).

Market Value as a Constitutional Mandate: The Central Guiding Principle

The decision contains the guiding principle on the valuation level that remains authoritative to this day:

"The valuation of the assets acquired when determining the inheritance tax assessment basis must, on account of the legislature's underlying decision to tax the increase in assets arising from an inheritance or gift, be uniformly aligned with market value as the decisive valuation objective. The valuation methods must ensure that all assets are recorded at an approximate value of market value."

The Court justifies this with reference to the nature of inheritance tax: it taxes the substance of the increase in assets accruing to the acquirer – that is, what could be realized upon a sale on the market. For this reason, market value within the meaning of § 9(2) BewG (the price obtainable in ordinary business dealings) is the constitutionally mandatory valuation standard.

A further, dogmatically far-reaching key finding concerns the function of the valuation level: the legislature may only introduce exemptions and preferential treatment after the valuation has been carried out – in the form of allowances, exemption discounts, or deferral rules. Differentiations within the valuation standard itself, by contrast, constitute concealed preferential treatment that violates the principle of equality and are therefore impermissible.

The Corridor Doctrine: ±20% for Expert Opinions, ±30% for Mass Valuation Procedures

In the grounds for the decision (para. 137 in conjunction with para. 167), the Federal Constitutional Court develops a tolerance-range doctrine that remains authoritative to this day for real estate valuers and for assessing tax-related mass valuation procedures:

Individual expert valuation (approx. ±20%): Even a methodically flawless market value appraisal does not produce a mathematically exact figure. Estimation uncertainties, discretionary margins in selecting the method, and market dynamics mean that a defensible appraisal report typically falls within a range of approximately 20 percent around market value. A systematic deviation beyond this threshold may indicate methodological errors.

Standardized mass valuation (approx. ±30%): For the legislature and tax authorities, which must value millions of properties through automated mass valuation procedures, a somewhat wider corridor is constitutionally permissible. Standardization must inevitably disregard individual particularities – a deviation of up to 30 percent around market value is tolerable in this context.

The unit value law then in force, however, regularly fell substantially below or exceeded this corridor – hence the unconstitutionality.

Subsequent Legislation: §§ 157–203 BewG and § 198 BewG

The Inheritance Tax Reform Act created the new §§ 157 to 203 BewG effective 1 January 2009. Since then, the valuation of developed properties has been carried out using the sales comparison approach (§ 182 BewG), the income approach (§§ 184–188 BewG), or the cost approach (§§ 189–191 BewG) – all aligned with market value.

Of central practical importance is § 198 BewG: "If the taxpayer proves that the market value of the economic unit on the valuation date is lower than the value determined pursuant to §§ 179, 182 to 196, that lower value shall be applied." This proof provision is the direct statutory implementation of the constitutional court's mandate: anyone able to demonstrate that the standardized tax value exceeds the market value is entitled to have the lower value applied – in practice, through a qualified expert appraisal report.

Significance for Valuation Practice

The decision of 7 November 2006 is the constitutional root of nearly all BFH decisions on real estate valuation in inheritance and gift tax law. It explains why the qualified market value appraisal as a proof instrument under § 198 BewG is not merely provided for by statute, but constitutionally mandated.

For valuers in valuation law, this means: methodologically sound alignment with market value pursuant to § 194 BauGB and with the procedures of the German Ordinance on the Valuation of Real Estate (ImmoWertV) is not a mere formality but a constitutional requirement. Anyone preparing an appraisal report under § 198 BewG is implementing the constitutional mandate of the First Senate.