Impact of inheritance tax in cross-border successions: bequeathing your Swiss or British property to your heirs
In this fifth and final part of our series on cross-border inheritance, we look at the inheritance tax rules that are activated when passing Swiss or UK property to heirs by death, including the significant impact of UK/Swiss inheritance tax treaty law.
To sum up our cross-border series: in parts one and two we have focused on the lifetime tax considerations for buying property in Switzerland or the UK, and in parts three and four we have examined in particular what happens to the succession of Swiss real estate on the death of its British owner, and the practical aspects of the transfer of Swiss real estate on the death of its non-Swiss owner.
Inheritance against inheritance tax
A first key point to note is that inheritance and inheritance rights, although intimately linked, are not the same thing. The estate is the one who inherits, and inheritance tax is the taxes paid as a result of the transfer of assets. Thus, although both are in principle linked to a death, it often happens that the inheritance and tax rules of one jurisdiction are not aligned with those of another, which makes the management of cross-border estates all the more complicated. We do not intend to discuss here the complexity of the rules of succession, except to note that even if a court does not have jurisdiction to rule on the succession of an estate, it does not necessarily follow that ‘She will not seek to apply inheritance tax to the same assets.
Switzerland and the United Kingdom are prime examples. The classic scenario is that of a British owner of Swiss real estate, where a Swiss canton is deemed competent to rule on the succession of the property and apply Swiss inheritance tax to it, while the United Kingdom is at the same time seeking submit the property to the UK. inheritance tax as the owner was domiciled in the UK at the time of death. The same with a Swiss owner of property in the UK (see more details below) – this is where the UK/Swiss Inheritance Tax Treaty (the Double Taxation Treaty) plays a vital role in mitigating exposure to double taxation which of course would otherwise be a very undesirable outcome. The UK and Switzerland have relatively few tax treaties relating to inheritance tax and so the certainty it provides is very beneficial for Swiss/UK international estates – without it relief may be available under the law. British and/or Swiss national, but it is much less secure.
Foreign property tax
I am a UK resident and own residential property in Switzerland. How will this be subject to inheritance tax upon my death?
Inheritance tax in the UK
For those who are resident but not domiciled (in the English sense of the term) in the UK, exposure to UK inheritance tax is limited to assets located in the UK. Therefore, on the death of a UK res non-dom, UK inheritance tax will not be payable on assets located in Switzerland.
However, for those resident and domiciled in the UK (both under general law and those deemed to be domiciled for UK tax purposes), there is potential exposure to UK inheritance tax on assets global. Therefore, on the death of a UK “res dom” who directly owns immovable property located in Switzerland, UK inheritance tax will be due on the immovable property at the rates shown above. Certain types of structuring (eg holding through a corporation) may help limit this exposure in certain circumstances, but the benefits of this structuring should be weighed against other tax and non-tax implications.
Swiss inheritance tax
As the property is located in Switzerland, the cantonal law on inheritance tax of the canton where the property is located must be taken into account, as it provides for the taxing rights even when there is a non-Swiss tax resident owner.
Taking Geneva or Valais as an example – cantonal law on inheritance tax provides that if a property is located in the canton, then that canton has a right to tax the property even if the owner was not a tax resident Swiss at the time of his death. The competent canton will then impose the property, inheritance rules and tax rates depending on (i) the value of the property, and (ii) the relationship between the deceased and the heir(s). It should be noted that most cantons exempt inheritance transfers between spouses and in the direct line (children, parents, etc.).
Double taxation agreement between the United Kingdom and Switzerland
As noted, the UK and Switzerland have relatively few inheritance tax treaties with other countries. taxation in certain circumstances.
Very generally, the double tax treaty sets out a list of rules aimed at granting unique (or limited) taxing rights to one jurisdiction or another, depending on the specific circumstances. It is therefore essential that the double tax treaty be consulted in order to determine potential tax liabilities.
In the example above, based on Article 5, if you are deemed to be a “conventional resident” in the UK (which, although it has similarities, is a different concept of residence from tax, domicile and deemed domicile), taxation of rights to a Swiss property is given to Switzerland (with credit given to the UK), thereby mitigating the impact of double exposure. However, there may still be exposure to UK inheritance tax in the event that the UK inheritance tax rate exceeds the Swiss inheritance tax rate ( the UK exposure being limited to the excess tax rate).
Swiss tax residents owning property in the UK
I am a Swiss tax resident and own residential property in the UK. How will this be subject to inheritance tax upon my death?
Inheritance tax in the UK
UK property is property situated in the UK and will therefore be included in the UK inheritance tax net, regardless of the tax status of the owner. Therefore, a UK property owned by a Swiss resident will be subject to UK inheritance tax at a rate of 40% on death on the value of the property above the zero rate band “excluding tax”. (currently £325,000), subject to any relief. or exemptions. A good example is the spousal exemption: assets passed to the surviving spouse on the death of the first spouse will not be subject to UK inheritance tax (unless there is a mismatch of domicile between the spouses, in which case the value which can be tax-exempt between spouses may be restricted).
As noted earlier in this series, over the past decade trends have seen a steady increase in the tax exposure of non-UK residents on UK residential properties, including potential inheritance tax exposure to United Kingdom in the event of death. As a result, the advantages of “traditional” structuring (such as, for example, ownership through a trust or a corporation) have been somewhat restricted, so that very often the settlors and shareholders would still be exposed to UK inheritance tax on death despite only indirect involvement.
However, non-UK residents can still consider taking advantage of the more universal methods of mitigating potential exposure to UK inheritance tax – debt (i.e. a mortgage, provided it is good type and certain specific conditions are met), joint ownership, life insurance and Estate planning can help hedge risk and reduce potential exposure at death.
Swiss inheritance tax
The initial position is that Switzerland is competent to levy Swiss inheritance tax on the property of those who die while they are resident for tax purposes in Switzerland (ie their last domicile, in the Swiss sense of the term).
As Switzerland and the UK would seek to tax property, the double tax treaty must again be considered. As above, in accordance with clause 5, as the property here is located outside of Switzerland, Switzerland will not levy Swiss inheritance tax on it.
Who pays the tax?
Who is responsible for processing tax returns and paying any tax due depends primarily on the laws of the jurisdiction governing the estate and is important to bear in mind when dealing with cross-border estates. Under English law, the executors/personal representatives of the estate of the deceased are responsible for dealing with the tax returns and debts of the estate, and payment is, in most cases, settled by the executors/ personal representatives with estate assets. Any UK inheritance tax must be paid in order to pass legal title to the UK property to the heirs.
Under Swiss law, the heirs are directly responsible for reporting and paying any tax liability of the deceased. The concept of “estate” in Switzerland does not exist in the same way as in the UK and therefore even if the deceased has appointed an executor, the heirs are still ultimately responsible for paying taxes arising from the estate . .
Earlier in this series we briefly looked at some of the planning opportunities that may be available in relation to property in the UK and Switzerland, but it is important to remember that there is no ” one size fits all” – what works as effective tax planning in one individual’s situation might be totally impractical for someone else. Understanding your potential exposure is always the first step, so personalized advice is always recommended. At Charles Russell Speechlys, we have Swiss and UK tax experts based in our Geneva and Zurich offices and are therefore perfectly placed to provide you with transparent cross-border advice.