A constitutional initiative calling for the introduction of a federal estate and gift tax is of concern to affluent Swiss residents and property owners. Although the new tax could be introduced in 2016, it would apply retroactively to any gifts, or estate planning measures undertaken as of 1st January 2012, making it difficult to plan today around taxes which, if at all, become law in 2016.
What is the Background and Content of this Proposal ?
In August 2011, a popular initiative requesting the introduction of a federal estate and gift tax was launched with the support of some political parties and labour unions. According to this proposal, gifts and estates would be subject to a new flat 20% tax if the donor or the deceased resided in Switzerland, or if probate proceedings are commenced in Switzerland. Gifts or bequests of Swiss Real Estate would always be subject to this tax irrespective of the residence of the donor or the deceased.
What are the major changes?
Currently gift and inheritance taxes are based on cantonal legislation varying significantly from Canton to Canton. Most Cantons exempt dispositions in favour of a spouse or direct descendants. In future, only dispositions in favour of a spouse or registered partner would be tax exempt.
If accepted the tax becomes effective retroactive to 1st January 2012. To calculate the new tax, assets owned at death as well as any gifts or assets settled into trusts, foundations and insurance policies as of January 2012 are considered.
· One-time exemption of CHF 2’000’000 per estate including taxable lifetime gifts;
· Gifts and bequests between spouses and registered partners;
· Gifts and bequests to tax exempt legal entities (e.g. charitable foundations);
· Gifts of up to CHF 20,000 annually per recipient.
Exemptions will be adjusted periodically to the cost of living index. Special exemptions and tax reductions will apply for farms and enterprises which continue to be operated for at least ten years by the recipients, in a way that doesn’t downsize operations or trigger job losses. The new rules will also apply to residents taxed on a lump-sum agreement. The new federal estate and gift tax will replace the current equivalent taxes which are levied at the Cantonal level. The taxes will continue to be assessed and collected by the Cantonal authorities. Two thirds of the estate/gift tax receipts are to be used to fund the Federal Old Age and Survivors’ Pension System. The remaining third will be stay with the Cantons.
Timing and Constitutional points to consider:
The initiative requires the support of 100,000 Swiss citizens in order to be put to a national referendum – a requirement likely to be fulfilled as the signatures have to be collected by 16 February 2013. To succeed, the referendum requires a “double majority” meaning approval by popular vote and by a majority of the voters in a majority of the Cantons. If approved, the new rules could become law in 2016, albeit retrospectively with respect to estate planning measures taken as of 2012.
Does this Constitutional Initiative have any chance of Succeeding?
It is impossible to predict the outcome of this initiative. However, currently public finances, in particular the future financing of old age pensions, are of great concern. Additional funding will be required in view of changing Swiss demographics. Most voters are affected by the looming pension funding crisis. Considering the tax exemptions (currently 2’000’000 per estate and spousal exemption which equates to 4’000’000 per couple) the proposed tax will not take money out of the pockets of most voters and their heirs. If gaps in pension funding can be filled by taxes levied on a small, affluent minority, by vote of a majority who would not pay going forward, but rather will benefit financially from their supporting this proposal, it is highly conceivable that this referendum will win the required political support.
What can those who may be affected do today?
It might well be that action needs to be taken before the end of this year - 2011. Tax free gifts to direct descendants are still possible in most Cantons this year. If advisable, a life-interest in real estate or certain movable assets can be retained. Conditional or revocable gifts may be advisable to legally avoid tax issues which could arise in other jurisdictions. A trust settlement made in 2011 may also be a solution. Persons concerned by the proposal should rapidly and thoroughly analyse their situation and consider implementing tax optimisation measures this year.
Source: Hélène Koller, Wealth Planning Consultant at Coutts & Co, Zurich in collaboration with David Woolley, Senior Client Partner.