Donations and Inheritance Issues: A Cantonal Prerogative
Swiss wealth planning | January 2020
If you would like to make a donation to a family member or a third party – maybe to a close friend or the partner living with you – and you’re wondering what the tax consequences would be? What will happen to your gift? Will it be taxed, and if so, under what terms?
Over the course of a lifetime, a person may wish to give something of value to one of his relatives, something other than a strictly personal item, either to help him or else to assist him financially. When it comes to inheritance issues, all of us will be concerned, sooner or later. Therefore, it’s all the more useful to understand the financial impacts of such decisions in order to have a more enlightened view. In both cases, it is likely that the transferred values will be taxed.
In general, inheritance tax affects the transfer of wealth after a death (inheritance and bequest), while the tax on donations is charged on freely given gifts, that is to say those given without consideration. Therefore, it is the transfer of ownership that makes the donation subject to what is considered an indirect tax. The value taxed is, in principle, the market value of the transferred assets. These two taxes do not exist at the federal level because there is no constitutional legal basis for the Confederation to levy them. At cantonal level, there is also no obligation to levy the tax. Each canton is therefore free to draft its own legislation and decide whether to levy this type of tax or not. If a canton chooses to levy the tax, it may be applied either at the cantonal level only, or at both the cantonal and municipal level. Nonetheless, it is possible that municipalities do not levy any such tax, but still benefit from a part of the associated tax revenues.
Thus, there are major differences amongst cantons regarding the implementation of tax on donations or inheritances. For example, the cantons of Schwyz (SZ) and Obwalden (OW) have opted to not levy any taxes on donations or inheritances, regardless of the family relationship between the parties involved in the transfer of ownership. The canton of Lucerne (LU) for its part does not tax donations but subjects those made during the last five years before the settlor’s death to inheritance tax.
This situation would have changed in 2015 if Swiss citizens had not voted down the referendum to introduce federal inheritance tax.
The majority of cantons impose a tax on donations, although direct family line donations are generally excluded, with the exception of the cantons of Vaud (VD), Neuchâtel (NE) and Appenzell Innerrhoden (AP IR). The canton of Geneva (GE) provides for an exception to the principle of direct line exemptions for citizens taxed according to the value in this canton.
As for the place of the tax liability that will also determine the rate applicable to the transfer of ownership, the canton of the donor’s last residence serves as the deciding factor. The taxpayer, on the other hand, is the donee, even though most cantons provide that the donor may be considered jointly and severally liable with the donee or at least in the alternative. When a donation is made to several people together, in principle each donee can only be held responsible for payment of the tax on the share which is due to him. In rarer cases, the donee may be held responsible for the payment of the tax up to the amount due to him. In rarer cases, the donee may be held liable for the payment of the tax up to the amount due to him.
As with donations, most cantons impose tax on inheritances. There are, however, two types of estate taxation. The most common is that on hereditary shares. This implies that the tax is levied on the share of each heir or legatee and can be calculated based on the amount. This type of taxation also has the advantage of being staggered, depending upon the degree of kinship. Another less common taxation method is levying an estate tax, which seeks to tax the estate as a whole before partition. In the canton of Solothurn (SO), this method of taxation is even coupled with the taxation of hereditary shares. In Graubünden (GR), taxation on the estate is carried out instead of taxation on hereditary shares, but municipalities may opt for a combination of the two methods.
In this context, the place of the tax liability is the canton where the deceased had his last residence and the taxpayer is the beneficiary of the taxable wealth, i.e. the heirs and/or legatees. The extent of the liability of the tax debtor(s), however, is not uniformly regulated in all cantons. In general, the heirs are jointly and severally liable for the payment of the entirety of the tax due, but this liability is limited to the extent of their inheritance. In other cantons, heirs are jointly and severally liable, as well as personally liable for the payment of taxes due on all their property. With regard to the legatees, in principle it is the heirs who must pay the tax, the onus being on them to get back from the legatee. However, it may happen that the legatee is responsible for the payment of the tax up to his share.
Income and earnings from the inheritance
It is important to note that inheritance tax applies to the estate, which is frozen on the day of death. Income and earnings generated after the death of an individual but prior to partition must be reported by each heir in proportion to their share.
In conclusion, we should therefore restate that the tax consequences of donations and inheritances are subject to cantonal law and vary greatly from one canton to another. It is therefore strongly advised to look at the tax consequences of a transfer inter vivos in advance and, respectively, to carry out estate planning.
The table below provides an overview of the tax rates in a few cantons. In general, it shows the highest tax rate imposed by the cantons. These amounts (in swiss francs) also take municipal taxes into account, where applicable.
When the tax rate on inheritances and donations is different, the first is the one related to the estate tax and the second is the one related to the tax on donations. The same logic applies for the exempt amounts.