diff --git a/lib/mcp/server.rb b/lib/mcp/server.rb
index 80cacd6c..819b10fd 100644
--- a/lib/mcp/server.rb
+++ b/lib/mcp/server.rb
@@ -219,6 +219,14 @@ def validate!
           message = "Error occurred in server_info. `description` is not supported in protocol version 2025-06-18 or earlier"
           raise ArgumentError, message
         end
+
+        tools_with_ref = @tools.each_with_object([]) do |(tool_name, tool), names|
+          names << tool_name if schema_contains_ref?(tool.input_schema_value.to_h)
+        end
+        unless tools_with_ref.empty?
+          message = "Error occurred in #{tools_with_ref.join(", ")}. `$ref` in input schemas is supported by protocol version 2025-11-25 or higher"
+          raise ArgumentError, message
+        end
       end
 
       if @configuration.protocol_version <= "2025-03-26"
@@ -259,6 +267,17 @@ def validate_tool_name!
       raise ToolNotUnique, duplicated_tool_names unless duplicated_tool_names.empty?
     end
 
+    def schema_contains_ref?(schema)
+      case schema
+      when Hash
+        schema.any? { |key, value| key.to_s == "$ref" || schema_contains_ref?(value) }
+      when Array
+        schema.any? { |element| schema_contains_ref?(element) }
+      else
+        false
+      end
+    end
+
     def handle_request(request, method)
       handler = @handlers[method]
       unless handler
diff --git a/lib/mcp/tool/schema.rb b/lib/mcp/tool/schema.rb
index f35d18e9..0b908f37 100644
--- a/lib/mcp/tool/schema.rb
+++ b/lib/mcp/tool/schema.rb
@@ -31,10 +31,6 @@ def deep_transform_keys(schema, &block)
         case schema
         when Hash
           schema.each_with_object({}) do |(key, value), result|
-            if key.casecmp?("$ref")
-              raise ArgumentError, "Invalid JSON Schema: $ref is not allowed in tool schemas"
-            end
-
             result[yield(key)] = deep_transform_keys(value, &block)
           end
         when Array
diff --git a/test/mcp/server_test.rb b/test/mcp/server_test.rb
index d6a9b1b7..b7c0e998 100644
--- a/test/mcp/server_test.rb
+++ b/test/mcp/server_test.rb
@@ -1184,6 +1184,44 @@ class Example < Tool
       assert_equal("Error occurred in Test resource. `title` is not supported in protocol version 2025-03-26 or earlier", exception.message)
     end
 
+    test "allows `$ref` in tool input schema with protocol version 2025-11-25" do
+      tool = Tool.define(
+        name: "ref_tool",
+        description: "Tool with $ref",
+        input_schema: {
+          type: "object",
+          "$defs": { address: { type: "object", properties: { city: { type: "string" } } } },
+          properties: { address: { "$ref": "#/$defs/address" } },
+        },
+      )
+      configuration = Configuration.new(protocol_version: "2025-11-25")
+
+      assert_nothing_raised do
+        Server.new(name: "test_server", tools: [tool], configuration: configuration)
+      end
+    end
+
+    test "raises error if `$ref` in tool input schema is used with protocol version 2025-06-18" do
+      tool = Tool.define(
+        name: "ref_tool",
+        description: "Tool with $ref",
+        input_schema: {
+          type: "object",
+          "$defs": { address: { type: "object", properties: { city: { type: "string" } } } },
+          properties: { address: { "$ref": "#/$defs/address" } },
+        },
+      )
+      configuration = Configuration.new(protocol_version: "2025-06-18")
+
+      exception = assert_raises(ArgumentError) do
+        Server.new(name: "test_server", tools: [tool], configuration: configuration)
+      end
+      assert_equal(
+        "Error occurred in ref_tool. `$ref` in input schemas is supported by protocol version 2025-11-25 or higher",
+        exception.message,
+      )
+    end
+
     test "raises error if `title` of resource template is used with protocol version 2025-03-26" do
       configuration = Configuration.new(protocol_version: "2025-03-26")
 
diff --git a/test/mcp/tool/input_schema_test.rb b/test/mcp/tool/input_schema_test.rb
index 45f98a0a..827eb589 100644
--- a/test/mcp/tool/input_schema_test.rb
+++ b/test/mcp/tool/input_schema_test.rb
@@ -92,16 +92,41 @@ class InputSchemaTest < ActiveSupport::TestCase
         end
       end
 
-      test "rejects schemas with $ref references" do
-        assert_raises(ArgumentError) do
-          InputSchema.new(properties: { foo: { "$ref" => "#/definitions/bar" } }, required: ["foo"])
-        end
-      end
-
-      test "rejects schemas with symbol $ref references" do
-        assert_raises(ArgumentError) do
-          InputSchema.new(properties: { foo: { :$ref => "#/definitions/bar" } }, required: ["foo"])
-        end
+      test "accepts schemas with $ref references" do
+        schema = InputSchema.new(
+          properties: {
+            foo: { type: "string" },
+          },
+          definitions: {
+            bar: { type: "string" },
+          },
+          required: ["foo"],
+        )
+        assert_includes schema.to_h.keys, :definitions
+      end
+
+      test "accepts schemas with $ref string key and includes $ref in to_h" do
+        schema = InputSchema.new({
+          "properties" => {
+            "foo" => { "$ref" => "#/definitions/bar" },
+          },
+          "definitions" => {
+            "bar" => { "type" => "string" },
+          },
+        })
+        assert_equal "#/definitions/bar", schema.to_h[:properties][:foo][:$ref]
+      end
+
+      test "accepts schemas with $ref symbol key and includes $ref in to_h" do
+        schema = InputSchema.new({
+          properties: {
+            foo: { :$ref => "#/definitions/bar" },
+          },
+          definitions: {
+            bar: { type: "string" },
+          },
+        })
+        assert_equal "#/definitions/bar", schema.to_h[:properties][:foo][:$ref]
       end
 
       test "== compares two input schemas with the same properties, required fields" do
diff --git a/test/mcp/tool/output_schema_test.rb b/test/mcp/tool/output_schema_test.rb
index 0eb160d4..5445462d 100644
--- a/test/mcp/tool/output_schema_test.rb
+++ b/test/mcp/tool/output_schema_test.rb
@@ -82,16 +82,41 @@ class OutputSchemaTest < ActiveSupport::TestCase
         end
       end
 
-      test "rejects schemas with $ref references" do
-        assert_raises(ArgumentError) do
-          OutputSchema.new(properties: { foo: { "$ref" => "#/definitions/bar" } }, required: ["foo"])
-        end
+      test "accepts schemas with $ref references" do
+        schema = OutputSchema.new(
+          properties: {
+            foo: { type: "string" },
+          },
+          definitions: {
+            bar: { type: "string" },
+          },
+          required: ["foo"],
+        )
+        assert_includes schema.to_h.keys, :definitions
       end
 
-      test "rejects schemas with symbol $ref references" do
-        assert_raises(ArgumentError) do
-          OutputSchema.new(properties: { foo: { :$ref => "#/definitions/bar" } }, required: ["foo"])
-        end
+      test "accepts schemas with $ref string key and includes $ref in to_h" do
+        schema = OutputSchema.new({
+          "properties" => {
+            "foo" => { "$ref" => "#/definitions/bar" },
+          },
+          "definitions" => {
+            "bar" => { "type" => "string" },
+          },
+        })
+        assert_equal "#/definitions/bar", schema.to_h[:properties][:foo][:$ref]
+      end
+
+      test "accepts schemas with $ref symbol key and includes $ref in to_h" do
+        schema = OutputSchema.new({
+          properties: {
+            foo: { :$ref => "#/definitions/bar" },
+          },
+          definitions: {
+            bar: { type: "string" },
+          },
+        })
+        assert_equal "#/definitions/bar", schema.to_h[:properties][:foo][:$ref]
       end
 
       test "== compares two output schemas with the same properties and required fields" do
diff --git a/test/mcp/tool_test.rb b/test/mcp/tool_test.rb
index ede3fbfe..a0175ad4 100644
--- a/test/mcp/tool_test.rb
+++ b/test/mcp/tool_test.rb
@@ -320,7 +320,7 @@ def call(message, server_context: nil)
       assert_equal [{ type: "text", content: "OK" }], response.content
     end
 
-    test "input_schema rejects any $ref in schema" do
+    test "input_schema accepts $ref in schema" do
       schema_with_ref = {
         properties: {
           foo: { "$ref" => "#/definitions/bar" },
@@ -330,12 +330,10 @@ def call(message, server_context: nil)
           bar: { type: "string" },
         },
       }
-      error = assert_raises(ArgumentError) do
-        Class.new(MCP::Tool) do
-          input_schema schema_with_ref
-        end
+      tool_class = Class.new(MCP::Tool) do
+        input_schema schema_with_ref
       end
-      assert_match(/Invalid JSON Schema/, error.message)
+      assert_equal "#/definitions/bar", tool_class.input_schema.to_h[:properties][:foo][:$ref]
     end
 
     test "#to_h includes outputSchema when present" do
@@ -409,7 +407,7 @@ class OutputSchemaObjectTool < Tool
       assert_includes error.message, "string did not match the following type: number"
     end
 
-    test "output_schema rejects any $ref in schema" do
+    test "output_schema accepts $ref in schema" do
       schema_with_ref = {
         properties: {
           foo: { "$ref" => "#/definitions/bar" },
@@ -419,12 +417,10 @@ class OutputSchemaObjectTool < Tool
           bar: { type: "string" },
         },
       }
-      error = assert_raises(ArgumentError) do
-        Class.new(MCP::Tool) do
-          output_schema schema_with_ref
-        end
+      tool_class = Class.new(MCP::Tool) do
+        output_schema schema_with_ref
       end
-      assert_match(/Invalid JSON Schema/, error.message)
+      assert_equal "#/definitions/bar", tool_class.output_schema.to_h[:properties][:foo][:$ref]
     end
 
     test ".define allows definition of tools with output_schema" do