Inheriting property can be a wonderful opportunity to supplement your patrimony with property which may be of great value. Nonetheless, an inheritance also entails an administrative burden which includes considerable tax implications. It means taking on a major responsibility which is occasionally better to entrust to professionals.
Inheritance, a huge step
The inherited property can be an excellent opportunity if it is well located and in a good state of repair; two factors which ensure attractive pricing. On the condition, however, that the debt is not too high and that it can be borne by the heirs. Last but not least, utilities and expenses (heating, hot water, taxes) need to be brought under control. If the property is rented out, the tenants must pay their rent regularly.
If all these conditions are fulfilled, the heirs may effectively receive property of real value, where the promises of capital gain and yield may safeguard well-being for many years. Unless they decide to sell the property and to pocket the gain.
Notwithstanding, they would be well served to consult a professional in order to be able to fully benefit from the advantages of the property which they have inherited.
The property could be poorly located or may require substantial and expensive renovation, or may even be lumbered with debt. Reselling the property may simply produce an amount which barely covers utilities and expenses, or does not manage to cover them at all. It is therefore necessary, before accepting – or refusing – the inheritance, to check the market value of the property, its intrinsic condition and the debt for which it is a security.
In all instances, an inheritance is subject to inheritance tax. In Switzerland, this tax depends on the canton and the municipality of residence of the deceased person, of the location of the property in question and of the degree of kinship between the heir and the deceased person. The tax may be non-existent for lineal descendant inheritance and whenever the value of the inheritance is low. It can, however, also amount to several dozen thousand Swiss francs whenever the degree of kinship between the deceased person and the heir is tenuous. Tax is calculated on the basis of the property’s taxable value.
Finally, once inheritance tax has been paid, the heir needs to think about their own tax declaration for the years to come. As the heir’s patrimony has been supplemented, they may even be subject to wealth tax. If the property is rented out, the rent paid will increase the heir’s revenue and, as such, the related tax.
In any event, the heir should arrange a meeting with a professional to anticipate the implications of an inheritance on their personal situation.
Example of lineal descendant inheritance:
Let’s take the example of a property located in Lausanne and belonging to a person resident in the same municipality, who has just died and has bequeathed the property to their daughter:
Taxable value of the property: 1,000,000 Swiss francs
Mortgage debt: 400,000 Swiss francs
Flat-rate deduction: 20% of the property value (200,000 Swiss francs)
Value of the property subject to tax: 400,000 Swiss francs
The cantonal tax rate stands at 1.848%, the municipal rate is the same, thus a total of 3.696%.
Cantonal tax amount: 7,392 Swiss francs. Municipal tax: 7,392 Swiss francs. Total tax: 14,784 Swiss francs.
There is a way to curb the tax burden. By staggering the transmission of the property over several steps and several years. The donor can, as such, bequeath their property in advance (during their lifetime) to their heirs whilst retaining the usufruct. In such cases, the testator is no longer the owner but continues to enjoy the use of their dwelling. The heir becomes the owner, but without the related rights: the heir cannot evict the occupant. If they wish to initiate substantial work (repairs, improvements), the owner and the usufructuary must reach an agreement beforehand.
The tax authorities will, in this case, undertake expert calculations to determine the share of taxes which each party must pay. The calculation basis is the donor’s life expectancy at the date the advancement is made. As the tax authorities apply a franchise (250,000 Swiss francs in the Vaud canton), the tax burden is reduced. If the taxable value of the property attributed to the owner or to the usufructuary is below this franchise, then the tax itself is reduced.
The heir must make sure that:
- the property is in a good state of repair;
- it is not debt-ridden;
- they can bear the tax burden;
- they can meet the property’s running and maintenance costs.
To curb the tax burden, they can propose:
- An advancement on the property, so that the tax burden can be shared.
Would you like more information on this topic? Have you other real estate-related questions? If so, our expert brokers are on-hand and will be delighted to answer your questions and advise you!