It's true what they say; few things are as sure in life as taxes.
Although Swiss taxation is not the highest in international comparison and the tax system is generally precise and predictable, this does not mean the tax authorities miss out on opportunities to tax.
In particular, inheritance taxes are straightforward to levy, and without prior tax planning, there's not a lot to mitigate.
In this post, we look at inheritance tax in Switzerland, the assessment of tax liabilities, and inheritance tax rates. We complete the picture by covering gift taxes, inheritance tax planning opportunities, and international and pre-immigration situations.
The Swiss inheritance tax system
The cantons in Switzerland levy inheritance taxes and gift taxes, so there are 26 regulations to follow.
Except for the cantons of Schwyz and Obwalden, all cantons levy inheritance taxes.
The canton of Lucerne does not levy a gift tax, although gifts made in the last five years of the donor's life are used to calculate the inheritance tax.
How inheritance tax works
Inheritance taxes are one-time taxes owed by the beneficiary on the transfer of assets upon death.
Most cantons tax the inheritance of the individual beneficiary to the extent of the individual's share of the total estate, meaning that whoever receives the assets becomes subject to tax.
Therefore, taxation is based on the individual case. On the one hand, tax rates are graded according to the relationship between the beneficiary and the deceased person, and, on the other hand, the tax progression is based on the amount of the transferred wealth.
Close family relationships lead to tax exemption or substantially reduced tax rates.
Family wealth preservation
With the above approach, the Swiss tax system indirectly contributes to preserving family wealth since close relatives are taxed less or not at all.
In addition, testators are encouraged to transfer wealth within the family due to preferential inheritance tax treatment.
Every beneficiary is responsible for settling the personal tax burden on the net amount received. Only two cantons, namely Graubünden and Solothurn, levy inheritance taxes on the overall estate without considering the degree of relationship.
Cantonal competences
As a general rule, inheritance tax in Switzerland occurs at the last residence or abode of the deceased person.
The Swiss Constitution prohibits double taxation between cantons, so they must follow specific allocation rules developed by the Swiss Federal Supreme Court.
The decisive factor is the last tax residence or domicile of the deceased person. An exception to the tax sovereignty defined in this way exists for real estate, which, similarly to international circumstances, entails taxation at the place where it is located.
The cantons apply quotas to their territory to avoid double taxation. There are also agreements between the cantons, which must not run counter to the collision norms.
Who is subject to Swiss inheritance tax?
In principle, the taxable person is the bearer of rights and obligations. These can be natural persons and legal entities that receive assets granted based on inheritance, legacy, usufruct, or donation.
Inheritance tax exemptions
Tax exemptions are subjective, i.e., based on the tax subject's personal characteristic or relationship, or objective, i.e., based on the tax object and specific circumstances.
In most cantons, spouses and direct descendants are exempt from gift and inheritance tax. They also provide for tax allowances based on the degree of family relationships for other relatives.
What is subject to inheritance tax in Switzerland?
The tax object is the gratuitous acquisition and transfer of assets that have a monetary value. If the acquirer pays consideration or has a claim, the acquisition is not gratuitous.
Wealth transfers subject to inheritance tax
The transfer of wealth upon death may occur under the legal succession, a disposition upon death, or an inheritance contract.
Beneficiaries may be appointed through a wealth transfer upon death, legacies may be granted, usufruct may be given, and foundations may be established.
The transfer to a foundation is usually subject to gift or inheritance tax at high tax rates since the founder and foundation are considered unrelated parties.
However, some cantons follow a transparent approach by considering the relationship of founder and beneficiaries, thereby reducing tax rates or exempting wealth transfers to foundations with family beneficiaries.
In the case of legacies, the beneficiary acquires a claim against the heirs, which is taxed as soon as the wealth transfer accrues. In the case of property and rights, the objective value is taxed.
Legacies can take various forms, such as waiving claims, procuring assets for the beneficiary's benefit, or granting usufruct rights.
By rejecting or renouncing the inheritance or legacy, beneficiaries can avoid possible taxes.
Gift taxes
Gift taxes complement inheritance taxes and tackle wealth transfers during a lifetime. For tax purposes, a gift is a voluntary and gratuitous donation inter vivos of money, property, and rights of any kind.
According to case law, for a tax to be levied, there must be i) a causal connection between the donor's outflow of assets and the donee's enrichment, ii) the absence of consideration, and iii) an animus donandi, i.e., the willingness to make a gift. Gifts may not be based on any other legal ground.
However, a gift may also be deemed to have been made if the donation of assets is associated with consideration, but this consideration is manifestly disproportionate to the benefit.
This is the case if the consideration does not correspond to the market value of the gift tax object, something that the taxman will want to adjust and tax.
Gift tax exemptions
Gifts may be exempt from tax based on subjective criteria such as family relationships or objective criteria. For example, in the canton of Zurich, customary occasional gifts with a value of less than CHF 5,000 are not subject to gift tax.
Also, here, the Swiss tax system encourages family wealth transfers due to preferential taxation or exemption.
Gift tax application
For a tax application, the gift must be executed, and wealth must be transferred. Gift promises in themselves do not trigger any tax consequences. If assets are subsequently transferred, the fair market value is generally used as a basis.
Persons who have received a taxable gift are obliged to submit a tax return within three months of the execution of the gift without being requested to do so.
If they do not file the tax return or submit it late, compensatory interest may be charged. The donor is jointly liable with the donee for the gift tax.
Usufructuary rights and other claims to periodic benefits (e.g., lifelong rights to live in a house) are taxed according to their capitalized value. This depends on the benefit, the expected duration, and the capitalization rate.
In the case of life-long usufructuaries and periodic benefits, the benefit period is based on the statistical life expectancy of the entitled person.
Legal entities domiciled in the Canton of Zurich that pursue public or charitable purposes and are exempt from tax liability are also exempt from gift and inheritance tax.
The inheritance tax assessment process
Let's stick to Zurich, our home, to review a cantonal tax assessment procedure. Inheritance tax proceedings are initiated ex officio. The division of the estate, on the other hand, is the responsibility of the heirs or the executors.
The inventory procedure is in writing and initiated within 14 days of the death. The heirs, executors, or representatives of the heirs have 60 days to complete and submit all required documents to the municipal tax office.
The tax inventory
The tax inventory that records the estate and assets of the deceased and all facts relevant to the assessment of inheritance tax and the tax return of the dead are the basis for the concrete tax calculations.
Heirs are jointly liable for inheritance taxes up to the amount of the net wealth transferred to them.
The tax department
The tax department will then examine inventory records, assess the deceased taxpayer's other tax duties, prepare the assessment of any inheritance and gift taxes and perform the tax assessment of the surviving spouse or the registered partner for the tax period from the date of death.
The taxpayer
Taxpayers must cooperate in the assessment process and provide the tax authorities with all documents necessary for the correct assessment following the law.
The delivery of the tax bill concludes the procedure, and taxes are to be settled within 30 days.
The inheritance tax rates
In the canton of Zurich, spouses and direct descendants are exempt from gift and inheritance taxes. Parents have a tax-free allowance of CHF 200'000 and siblings CHF 15'000.
Applicable inheritance tax rates
The tax rate for the first CHF 30'000 is 2%,
for the following CHF 60'000 3%,
the following CHF 90'000 4%,
the following CHF 180'000 5%,
the following CHF 480'000 6%,
the following CHF 660'000 7%
and for amounts above CHF 1.5 Mio 6%.
Depending on the relationship, these tax rates are multiplied by 1 for parents, 2 for grandparents, 3 for siblings, 5 for aunts and uncles, and 6 for non-related persons.
In the case of several wealth transfers to the same beneficiary by the same testator or donor, the tax rate is based on the total amount.
Inheritance tax calculations
To avoid detailed calculations, the tax authorities provide an online tax calculation tool. According to its estimates in Zurich, for an inheritance or gift of CHF 500'000 the following amounts would be due:
- CHF 12'000 for parents
- CHF 67'500 for siblings
- CHF 117'000 for aunts and uncles
- CHF 140'400 for non-related persons
The canton of Zurich provides reductions in the tax burden to facilitate the succession for businesses, which reduces the tax owed by 80% if the inheritance beneficiaries continue to run the business themselves.
A note about tax evasion and avoidance
In the canton of Zurich, whoever, as a taxpayer, intentionally or negligently causes an assessment to be wrongfully omitted or that a legally valid evaluation is incomplete will be liable to a fine.
As a rule, it corresponds to the amount of the tax evaded. It may be reduced to one-third in the case of slight culpability and increased to three times in the case of a severe fault.
In the case of voluntary disclosure, the fine is reduced to one-fifth of the evaded tax. Attempting to evade tax is also punishable. The penalty is two-thirds of what would be due in the case of completed tax evasion.
Whoever intentionally incites or aids tax evasion, intentionally causes or assists in tax evasion as a representative of the taxpayer, or assists in such tax evasion will be liable to a fine regardless of the taxpayer's criminal liability.
The penalty will be up to CHF 10'000, and in severe cases or repeated cases, up to CHF 50'000. In addition, the third party involved will be jointly liable for the additional tax up to the amount of the evaded tax.
The Swiss tax law provides for a one-time voluntary disclosure that does not lead to prosecution, provided that the tax evasion is not yet known to any authority, the taxpayer supports the authorities unconditionally and makes a serious effort to pay due taxes.
While the Swiss tax system seems to indulge tax evasion in an international comparison, severe criminal penalties apply for tax fraud.
Inheritance tax planning
The tax competition between cantons offers various tax planning opportunities by changing residence within Switzerland or investing in real estate located in cantons that don't levy inheritance taxes.
Donations within the tax-free threshold are another popular inheritance tax planning technique. Tax considerations can even trigger marriage.
Splitting wealth into bare ownership and usufruct can reduce tax progression, and life insurance policies can contribute to liquidity planning to cover potential inheritance taxes.
There are many more options, and if things get complex, a tax ruling can solve the issue.
That's, by the way, business as usual in Switzerland since tax authorities are supposed to have a service mentality and are open to discussing all kinds of scenarios.
International scenarios
In cross-border scenarios, double taxation can be caused by different criteria for tax, different definitions of the same criteria, or other tax concepts and ties.
Switzerland taxes based on the deceased person's last residence and the beneficiary's residence is irrelevant for the tax liability.
Foreign residents can also become subject to inheritance tax in Switzerland and have an obligation to file tax returns as outlined above.
International agreements
Switzerland concluded inheritance and estate tax agreements with the US, Germany, Denmark, Finland, France, UK, Northern Ireland, Netherlands, Norway, Austria, and Sweden.
Such agreements follow the residence principle, and the deceased person's last residence state will tax all worldwide assets.
The exception is real estate and movable assets of permanent establishments, to be taxed in the country of their location.
Without an inheritance tax treaty in place, things in cross-border scenarios can become expensive due to double taxation.
In the absence of a treaty, cantonal rules may only provide limited relief from double taxation, although a Swiss Federal Supreme Court decision precludes double taxation of foreign real estate.
Trusts and inheritance taxes
While direct and ongoing taxation of trusts is predictable under federal tax law, cantons may apply inheritance taxes in specific scenarios and tax the beneficiaries.
That's why it's essential to consider cantonal tax practices and, in the majority of cases, to obtain a tax ruling confirming their particular tax position.
Pre-immigration planning
Irrevocable discretionary trusts settled by a foreign resident settlor offer specific protection for new immigrants since they are usually not considered part of the settlor's taxable estate. Also, here, before immigration, a tax ruling can be obtained for clarity and predictability.
For new immigrants under a lump sum taxation arrangement, in any event, a tax ruling will be issued, and usually, it covers the tax treatment of trusts, life insurances, foundations, and other wealth and estate planning vehicles.
Furthermore, in immigration scenarios, an assessment of the applicable law for inheritances is advisable since a choice of governing law can offer planning opportunities. Existing wills should be reviewed and eventually revised.
Conclusion on inheritance tax in Switzerland
As with many things in Switzerland, procedures are fast, efficient, and straightforward. The country's liberal legal and tax environment enables predictable and effective wealth planning strategies and transfers.
In particular, family wealth can be preserved over generations due to gift and inheritance tax exemptions or reduced tax rates.
Cantonal inheritance taxes
Since cantons have the exclusive right to levy gift and inheritance taxes, local regulations need to be considered in domestic and international scenarios.
Inheritance tax planning is business as usual in Switzerland and can be discussed with the tax authorities and formalized in binding tax rulings to obtain certainty.
Switzerland's attractiveness
Considering the high quality of life, the central local, political, and economic stability, it's no wonder that Switzerland is a popular immigration destination for wealth owners and high earners.
We want to conclude with one main piece of advice for all tax scenarios: starting early with estate planning and tax planning is essential to achieve predictable and lasting results.
25-10-2021