Inheritance tax impact in cross-border estates: leaving your Swiss or UK property to your heirs
In this fifth and final part of our cross-border estates series, we are taking a look at the inheritance tax rules which are activated on the passing of Swiss or UK real estate to heirs on death, including the important impact of the UK/Swiss tax treaty on inheritance tax.
To recap our cross-border series: in Parts One and Two we focussed on lifetime tax considerations for purchasing real estate in Switzerland or the UK, and in Parts Three and Four we looked at what happens in particular to the succession of Swiss real estate on the death of its UK owner, and the practical aspects of transferring Swiss real estate on the death of its non-Swiss owner.
Succession v. inheritance tax
A first key point to note is that succession and inheritance tax, although intimately connected, are not the same thing. Succession is who inherits, and inheritance tax is the tax paid as a result of the passing of assets. So although both are in principal connected with a death, it is often that the succession and tax rules of one jurisdiction are not aligned with another which makes dealing with cross-border estates all the more complicated. We do not intend to discuss the complexities of succession rules here, save to note that even if a jurisdiction is not competent to rule on the succession of an estate, it does not necessarily follow that they will not seek to apply inheritance tax to the same assets.
Switzerland and the UK are prime examples. The classic scenario is a British owner of Swiss real estate, where a Swiss canton is deemed competent to rule the succession of the property and to apply Swiss inheritance tax to the same, whereas the UK at the same time seeks to subject the property to UK inheritance tax as the owner was domiciled in the UK at the time of death. Similarly with a Swiss owner of real estate in the UK (see further details below) – this is where the UK/Swiss tax treaty on inheritance tax (the Double Tax Treaty) plays a vital role in mitigating the exposure to double taxation which of course would otherwise be a very undesirable outcome. Both the UK and Switzerland have entered into relatively few tax treaties concerning inheritance tax and so the certainty it provides is very beneficial for international Swiss/UK estates – without it, relief may be given under UK and/or Swiss domestic law, but this is far less certain.
Tax on overseas property
I am a UK resident owning Swiss residential property. How will this be subject to inheritance taxes on my death?
UK inheritance tax
For those who are resident but not domiciled (under the English sense of the word) in the UK, exposure to UK inheritance tax is limited to UK situs assets. Therefore, on the death of a UK ‘res non-dom’, UK inheritance tax will not be chargeable on property located in Switzerland.
However, for those who are resident and domiciled in the UK (both under general law and those who are deemed domiciled for UK tax purposes), there is potential exposure to UK inheritance tax on worldwide assets. Therefore, on the death of a UK ‘res dom’ who directly owns property located in Switzerland, UK inheritance tax will be chargeable on the property at the rates set out above. Certain types of structuring (for example, holding via a company) may assist in limiting this exposure in certain circumstances, but the benefits of this would need to be balanced with other tax and non-tax implications.
Swiss inheritance tax
As the property in located in Switzerland, the cantonal inheritance tax law of the canton where the property is located needs to be considered, as it provides for the taxing rights even when there is a non-Swiss tax resident owner.
Using Geneva or Valais as an example - the cantonal inheritance tax law provides that if a property is located in the canton, then that canton has a taxing right over the property even if the owner was not a Swiss tax resident at the time of his death. The competent canton will then tax the property, with the 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 is worth noting that most of the cantons exonerate the transfer of assets between spouses and in a direct family line (children, parents, etc.).
UK - Switzerland Double Tax Treaty
As noted, both the UK and Switzerland have entered into relatively few tax treaties concerning inheritance tax with other countries, and so those dealing with cross-border estates with UK and Swiss connections can be comforted to know this mechanism exists to mitigate potential exposure to double taxation in certain circumstances.
Very broadly, the Double Tax Treaty sets out a list of rules, seeking to grant sole (or limited) taxing rights to one jurisdiction or another, depending on the specific circumstances. It is therefore vital that the Double Tax Treaty is consulted in order to determine potential tax liabilities.
In the above example, based on Article 5, if you are deemed to be ‘treaty resident’ in the UK (which, although with similarities, is a different residence concept to tax residence, domicile and deemed domicile), taxing rights to a Swiss property is given to Switzerland (with a credit given in the UK), thereby mitigating the impact of the double exposure. However, there may still be exposure to inheritance tax in the UK in the event that the UK inheritance tax rate exceeds the Swiss inheritance tax rate (with the UK exposure limited to the excess tax rate).
Swiss tax residents owning UK residential property
I am a Swiss tax resident owning UK residential property. How will this be subject to inheritance taxes on my death?
UK inheritance tax
UK real estate is a UK situs asset, and so will be within 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 ‘tax free’ nil rate band (currently £325,000), subject to any reliefs or exemptions. The spouse exemption is a good example – assets passing to the surviving spouse on the death of the first spouse will not be subject to UK inheritance tax (unless there is a mis-match in domicile between the spouses, in which case the value which can pass tax-free between spouses may be restricted).
As noted earlier in this series, over the last decade trends have seen a steady increase in the tax exposure for non-UK residents on UK residential property, including the potential exposure to UK inheritance tax on death. Therefore, the benefits of ‘traditional’ structuring (such as, for example, ownership through a trust or company) have been somewhat restricted so that it is very often the case that settlors and shareholders are still exposed to UK inheritance tax on death despite only an indirect involvement.
However, non-UK residents can still consider taking advantage of the more universal methods for mitigating potential UK inheritance tax exposure - debt (i.e. a mortgage, provided it is the right kind and certain specific conditions are met), co-ownership, life insurance and Will planning can all assist in covering the risk and reducing the potential exposure on death.
Swiss inheritance tax
The initial position is that Switzerland is competent to levy Swiss inheritance tax on the assets of those who die whilst Swiss tax resident (ie. their last place of domicile, using the Swiss sense of the word).
As both Switzerland and the UK would seek to tax the property, the Double
Tax Treaty again needs to be considered. As above, in accordance with Article 5, as the property here is located outside of Switzerland, Switzerland will not levy Swiss inheritance tax on the same.
Who pays the tax?
Who is liable to deal with the tax filings and pay any tax due depends primarily on which jurisdiction’s laws govern the succession 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 taking care of the estate’s tax filings and liabilities, and payment is, in most circumstances, settled by the executors/personal representatives with estate assets. Any UK inheritance tax liability must be settled in order to be able to transfer the legal title of the UK real estate to the heirs.
Under Swiss law, the heirs are directly responsible for the filings and payment of any tax liability of the deceased. The concept of an ‘estate’ in Switzerland does not exist in the same way as it does in the UK and so even if the deceased appointed an executor, the heirs are still ultimately responsible for the payment of taxes arising as a result of the succession.
Earlier in this series we looked briefly at some of the planning opportunities which may be available in relation to UK and Swiss real estate, however it is important to remember that there is no ‘one size fits all’ – what works as efficient tax planning in one individual’s circumstances could be entirely impractical for someone else. Understanding your potential exposure is always the first step, and so tailored advice is always recommended. At Charles Russell Speechlys we have Swiss and UK tax experts based in both our Geneva and Zurich offices and so are perfectly placed to provide you with seamless cross-border advice.
For more information please contact Sophie Hart at Sophie.Hart@crsblaw.com.