A proposal to stiffen the inheritance and gift tax laws in Switzerland has sent many wealthy residents running to their accountants for advice.
The people’s initiative, backed by a coalition of left leaning parties, aims a broadside at the assets of multi-millionaires by insisting that they relinquish a fifth of their wealth when it is passed on to the next generation.
The expected SFr3 billion ($3.27 billion) in extra tax revenues would help plug a growing hole in the state pension fund, supporters say. Critics have argued that the adoption of such measures would drive rich individuals and families away from Switzerland, denying cantons much needed sources of income.
At present, the federal authorities do not impose central inheritance or gift taxes if people choose to hand their assets on to others.
All cantons, besides Schwyz, charge varying amounts for passing wealth to the next generation. Most cantons also apply a charge for financial gifts – with varying limits – while the owner of the assets is still alive.
But in both cases, most cantons exempt spouses and direct descendants from the tax. Beneficiaries who are not direct descendants, on the other hand, could face a bill of around 50 per cent of the assets they receive.
The initiative wants to harmonise the taxes by charging a national 20 per cent rate on inheritances worth more than SFr2 million ($2.18 million) and gifts of more than SFr20,000 per year.
The Social Democrat party says the changes – if voted in by the public – would bring order to a chaotic system. Furthermore, the measures would bring more equality to Switzerland by ensuring that the rich do not go on becoming richer at the expense of others, the party argues.
“The richest one per cent of taxpayers possess the same wealth as the other 99 per cent,” the Social Democrats stated in its campaign literature. “Since in Switzerland the largest fortunes can be passed on untaxed, this concentration of wealth becomes more pronounced.”
“An inheritance tax on the largest fortunes would counteract this socially harmful development.”
Breaking the trend
While many other countries have central inheritance taxes, a successful vote in the initiative would represent a significant change in Switzerland, according to Frank Lampert, head of international private client services at KPMG Switzerland.
“This breaks the trend from the last few years of reducing taxes to make cantons more attractive to the wealthy,” he told swissinfo.ch. “As a result, Switzerland could become less attractive to wealthy people, particularly those who retire after a successful business life and want to transfer their tax affairs to a more attractive environment.”
In the 1990s and early 2000s, many cantons abolished the practice of taxing fortunes passed down to family members. Cantons have also slashed wealth and income taxes in a bid to attract more wealthy residents.
But the financial crisis has seen a backlash against this so-called race to the bottom with Zurich voting in 2009 to eradicate tax privileges for the rich, and other cantons also threatening to follow suit.
Stampede of fear
The authors of the inheritance tax initiative are currently going through the process of gathering enough signatures to force a vote. Such a vote could not take place for some years with possible changes to the law unlikely to happen before 2016.
But while tax changes are far from a foregone conclusion, lawyers and financial advisors have reported a recent stampede for their services.
The panic has been caused by a clause in the initiative that would retroactively tax inheritance transfers made from January 1, 2012.
The NZZ am Sonntag newspaper reported that inundated lawyers along Lake Zurich’s Gold Coast are having to turn away twitchy clients. And incidents of people gifting property to their family have increased from hundreds in normal years to thousands in 2011.
The absence of exit taxes means that wealthy residents could simply sidestep the proposed tax changes by moving away from Switzerland before they die, according to Lampert.
But those who choose to remain could also escape the taxes by moving assets, such as real estate, into trusts or foundations or by signing them into the control of their intended beneficiaries.
The initiative foresees the introduction of a new inheritance tax by 2016, but also calls for gifts to be taxed retrospectively from the beginning of next year.
Lampert urged wealthy people to show restraint before restructuring their assets. Moving wealth around could attract additional taxes, such as capital gains and transfer duties, he cautioned.
In addition, rich individuals could come unstuck by transferring control of their assets to others before they die, he added.
Passing the buck
Switzerland has no central inheritance or gift tax system, but cantons do charge such levies according to their own statutes.
Most cantons have decided not to charge such tax to spouses or direct descendants of wealthy residents. This leniency makes Switzerland an attractive place for rich people to relocate to once they have made their fortunes.
The people's initiative, launched in the late summer of this year, aims to change all that by harmonising inheritance and gift taxes.
The initiative calls for a nationwide 20% tax on inheritances of over SFr2 million. Spouses would continue to be exempt, but not descendants of the deceased.
Gifts of over SFr20,000 a year would also attract the same rate of tax.
If the initiative is successful, it is unlikely to be put into law before 2016. But wealth handovers dating from January 1, 2012 would be retroactively taxed.
Two thirds of the estimated SFr3 billion the tax changes would collect each year would be pumped into the state pension fund.
Cantons, that would be expected to collect the tax, would retain the remaining third of revenues.
The initiative has provisions to exclude the transfer of wealth to charitable organisations or other tax exempt institutions of a similar nature.
People passing on businesses or farms would also receive special treatment to reduce or eliminate their tax bills.