Structuring of real estate assets with a view to estate planning
Workshop on the occasion of the ISIS) seminar of 28 November 2019 entitled "Tax Aspects of Estate Planning for Real Estate".
1. nationals with real estate in another canton
1.1 Basic facts
Mr Amrein, who lives in Meggen (LU), owns a property in St Moritz which he inherited from his parents. Mr Amrein uses the property for holiday purposes. A few years ago, he invested significantly in it and took out two mortgages for CHF 1 million each, one fixed at 2% ongoing until the end of 2025 and the other variable or renewable at short notice for three months at a time at a current rate of 0.5%. He passed away at the end of October 2019 and leaves his widow and two joint children as heirs. In addition to the aforementioned property, he owned securities assets of around CHF5 million. He did not make any instructions in his will.
The local property tax value of the property in St. Moritz is CHF 3 million, the imputed rental value is CHF 50,000 per annum. The heirs are considering renovating the property to preserve its value, for which they have received a cost estimate of CHF 50,000.
- Who inherits the holiday property in St. Moritz?
- Are there inheritance taxes due?
- If inheritance taxes are payable, how could they have been avoided or reduced?
- Can heirs deduct value-preserving renovation costs from their income? If so, from what?
- Who has to pay the mortgage interest and who can deduct it from what?
- What would be the answer to questions (a) to (e) if the property were held through a real estate company established in the canton of Graubünden?
1.3 Factual Variant 1 (bequest to a loved one)
The starting position is the same as in the basic facts. However, the securities assets amount to CHF 20 million. Furthermore, Mr. Amrein has "different" age orientation. He bequeaths the property in St. Moritz to his friend or lover, who lives in the canton of Zurich and with whom he has been associated for about a year.
1.4 Questions on the facts of the case 1
- Are there any inheritance taxes associated with the bequest?
- Assuming that inheritance taxes are incurred, how can they be avoided?
1.5 Situation variant 2 (donation to charitable foundation)
Mr. Amrein owns a property in Riehen (Canton Basel City). Since his wife has died before and he has no descendants, he wants to donate the property to a foundation based in his home canton (Thurgau). The beneficiary foundation is dedicated to the preservation of the Swiss dialect, with special emphasis on the Thurgau dialect in times of increasing internationalisation.
1.6 Questions on the facts of the case 2
- Can Mr. Amrein deduct the grant from his taxable income?
- Is the gift tax due on the property donation?
2. foreigners with real estate in Switzerland
2.1 Basic facts
Mr. Hansen (German citizen), living in Hamburg, acquired a beautiful property above Vevey a long time ago, with a view of the sea and the distance. The property is unencumbered.
He dies in 2019 at a very old age and has decreed in his will that two of his five children will receive this "developed property in equal proportions as a non-eligible advance bequest", but with a life-long right of residence free of charge in favour of the widow (sub-bequest).
Mr. Hansen also owns a yacht on Lake Geneva (Swiss side), which he bequeathed to a nephew.
- What taxes are incurred in connection with the inheritance and the orientation of the legacies on the property? Which one on the yacht?
- Suppose that the Vaud tax authorities do not contact the heirs until nine years after Mr Hansen's death and tell them that they wish to claim inheritance tax. Another five years will elapse before the investment orders are issued. Are the authorities still getting away with this?
- What would have happened if Mr Hansen had had his last residence not in Germany but in the Netherlands?
3. nationals with real estate abroad
3.1 Facts of the case
In the late 1970s, Mr. Züst (Swiss citizen), who lives in Zurich, acquired a property in Westerland/Sylt under sole ownership for CHF 5 million with CHF 2 million equity and a mortgage of CHF 3 million from his Swiss bank. In addition, he maintains a bank account with a local bank there, where he settles the ongoing maintenance costs. The property in Westerland contains a valuable art collection consisting of early works by Gerhard Richter. In the garage belonging to it there is a Porsche 911 S.
On his death, Mr. Züst leaves behind his widow and two children (all Swiss citizens), but no testamentary disposition. At the time of his death, his widow had already been living in the property in Sylt for two years, as the maritime climate suited her; his two children live in Zurich.
- What are the tax consequences of the death of Mr. Züst in his canton of residence Zurich with regard to the property (as well as the art collection and the Porsche) in Germany?
- What applies to the Euro account at the local bank in Sylt?
- According to German law, a tax allowance is deductible from inheritance tax. If a lower allowance is provided for limited taxpayers (i.e. non-residents) than for unlimited taxpayers (i.e. residents or "nationals" under the German Inheritance Tax Act), what can be done about this?
3.3 Variation of the facts (enforcement)
The starting position is in accordance with the basic facts. After the death of Mr. Züst, his widow leaves Sylt; the heirs sell the property immediately. Meanwhile, the German tax authorities are in the process of determining the inheritance taxes owed. To this end, they request various information from the Swiss tax authorities and ask for assistance in enforcing the tax claim.
3.4 Questions on the facts of the case
- Will the German tax authorities receive information from their Swiss colleagues?
- Are the Swiss authorities assisting in the enforcement of the tax claim?
4. residents with real estate abroad, held through a trust/foundation
4.1 Facts of the case
Mr. Bentley (British citizen) has lived in Switzerland (Canton of Zurich) with his wife for over 20 years. He owns several properties abroad. They serve him in advance as yield properties. It holds these properties through local companies whose shares are held in a Jersey trust. This is administered by a trustee based there. Mr. Bentley established the Trust five years ago, i.e. after he moved to Switzerland.
In the summer of 2019, Mr. Bentley dies; he leaves behind his wife and two sons. Mrs. Bentley already has a daughter from her first marriage. This one is single and childless.
- How is a trust treated for tax purposes? What are the tax consequences of Mr Bentley's passing?
- What is to be done to avoid inheritance taxes in the event of the settlor's death?
- Mr. Bentley bequeaths to his wife all shares in a certain real estate company. 40% of these shares are encumbered with a legacy in favour of the subsidiary. However, the daughter rejects the legacy. Shortly thereafter, the mother successively gives her shares of around 40%. Tax implications?
- What would have been the situation if the foreign real estate had been contributed directly to the Jersey Trust (without an underlying company)?
4.3 Variant of the facts (foundation)
Mr. Bentley, now accustomed to the local legal culture, set up the Liechtenstein family foundation "pro filiis legitimis" ten years ago, which is intended to guarantee his male (legitimate) descendants an appropriate maintenance. The foundation holds all shares in a foreign company, which in turn has a rented house abroad as its only asset. Since Mr. Bentley does not fully trust the Liechtenstein trustees, he reserved the right of revocation at any time during his lifetime.
4.3 Questions on the facts of the case
- Why didn't Mr. Bentley simply set up a family foundation under Swiss law?
- How is the FL Foundation to be assessed for tax purposes until mid-2019?
- How is the FL Foundation to be assessed from mid-2019? Tax consequences in Switzerland?
5. foreigners with real estate in Switzerland, held by Schweizer Immobilien-AG
5.1 Facts of the case
Mr. Siemens from Berlin inherited from his father the shares of a joint-stock company with its registered office in Basel, the main asset of which was a condominium in a property near Locarno. The AG was still established under the predecessor laws of today's Lex Koller. The apartment has a book value of CHF 150,000 and a market value of approximately CHF 1 million. 30% of the financing comes from the AG's own funds, 70% is a shareholder loan (non-interest-bearing). Mr Siemens pays the AG an annual rent of CHF 15,000 (in addition to his interest waiver). He intends to carry out a total renovation, which is expected to cost several CHF 100,000, and is asking you for advice on how to proceed.
In the long term he would like to leave the apartment to his wife (if she survives) and his two children. But he is also thinking about selling.
- If Mr Siemens wants to inherit the property, what would you advise him to do?
- What are the tax consequences if Mr Siemens sells the Swiss real estate company to a compatriot?
- What would be the tax consequences if Mr. Siemens were resident in a state with which Switzerland has concluded a DTA in accordance with the OECD MA (e.g. France or UK) and he in turn sold the real estate company to a compatriot?
5.3 Variation of the facts (gift to a loved one)
Mr. Siemens' marriage is broken. In the meantime his mistress lives in the Ticino property. Mr. Siemens is considering giving her the shares in it to enable her to live a carefree existence.
5.4 Question on the facts of the case
What are the tax consequences of this procedure? What is your advice to Mr. Siemens?
6. crowdfunding by issuing real estate tokens
6.1 Facts of the case
A public limited company based in the canton of Zug issues Real Estate Token. The money collected when these tokens are issued is invested in domestic commercial real estate in several cantons. The token holder is entitled to the (net) rental income.
- How is the issue of the token to be treated for tax purposes?
- How are payments under the token to be treated for tax purposes?
- How are the tokens to be treated in case of inheritance?