Tax procedure in the event of an individual’s death in Switzerland

This subsequent contribution is the translation of of an article by the author that has been originally published in German.

1. Introduction

The death of a close person is a far-reaching event that brings tremendous grief for the relatives. Following the bereavement, the relatives must assume a range of tasks and obligations. The tax liability of the deceased ends with his death. The tax relations of the deceased are transferred to the heirs, which is why they are required to take care of a number of procedural duties relatively quickly following a brief period of reverence. The heirs must deal with tax claims relating to the ended tax liability of the deceased as well as tax claims concerning inheritance.

This article explains key aspects of the tax procedure in the event of a bereavement in which civil law naturally plays a significant role.

2. Succession in the event of a bereavement

According to Article 560 (2) of the Swiss Civil Code (CC), the property, the limited rights in rem and the possessions of the testator are transferred to the heirs. Here, tax law follows civil law in principle. The heirs are jointly and severally liable for the taxes owed by the testator up to the amount of their portion of the inheritance including prior gifts. In some cantons, the heirs are not only jointly and severally liable, but also personally liable with their entire assets for inheritance tax. Tax succession is tied to the status of heir under civil law. If the heirs reject the inheritance, tax succession no longer applies.

Each heir must fulfil the procedural duties and the payment obligations, although the tax authorities may choose from which heir they request the fulfilment of the procedural duties (e.g. cooperation) and the payment obligations. Income taxation is applicable to the income from the estate (e.g. bank interest, dividends, rental income, etc.) from the time the inheritance procedure is initiated (i.e. the death of the tax subject). Conversely, the accrual of the estate is exempt from income tax.

In the event that the testator does not leave behind any relatives entitled to the inheritance and has not instructed otherwise, the canton or the municipality of the most recent place of residence inherits the estate where this is provided for in cantonal law.

3. Inventory

Following the death of a tax subject, an inventory must first be prepared unless it is assumed that no assets exist. This is initiated within 14 days of death. The inventory deadline is usually short (e.g. 60 days in the Canton of Zurich). However, it merely concerns an administrative period. According to experience, this deadline is often extended in practice.

The inventory contains the assets of the testator, their spouse in unseparated marriage and their underage children under their parental care as at the date of death. The purpose of the inventory is to ascertain the assets belonging to the estate of the deceased. The inventory also serves as the basis for the inheritance tax assessment.

In the Canton of Zurich, the inventory process is carried out as part of the tax declaration procedure.

Prior to the inventory, heirs and persons who manage or hold the estate assets may only dispose over the estate assets with the consent of the inventory authority. This prohibition of disposal is only lifted once the inventory has been completed. However, it is important to note that the assets may continue to be blocked after completion of the inventory in order to secure an endangered tax claim.

4. Cooperation duties of the heirs

The heirs are subject to various cooperation duties. They are obliged to disclose truthful information to the competent tax authority about all circumstances that may be relevant for determining the tax factors of the testator. Estate assets that have not been recorded in the inventory must be declared upon discovery. The duty to cooperate exists beyond the preparation of the inventory.

A bank that manages the assets of the testator is required to provide the heirs all relevant information in writing. Banking secrecy may not be invoked here. However, the information duty only applies with respect to the heirs. If the persons subject to the duty to cooperate wilfully or negligently breach their cooperation duties, they may be punished with a fine.

5. Procedural appointment of the executor

The testator may assign one or more persons to execute their will in a testamentary disposition. This assignment is officially conveyed to them.

The executor must represent the last will of the testator and administer the estate, pay the debts of the testator (including tax debts), pass on the bequests and distribute the estate according to the instructions issued by the testator or the law.

6. Special aspects of inheritance tax

In Switzerland, the jurisdiction for inheritance tax lies exclusively with the cantons. The federation also has no power of harmonisation. The cantons are thus free to set the content of inheritance tax provisions. With the exceptions of the Cantons of Schwyz and Obwalden, all cantons levy inheritance taxes.

Tax and payment liability generally correspond with each other in inheritance tax. In the Canton of Zurich, the recipient of the transferred assets is liable to taxation. The tax is due from the tax subject and should not be borne primarily by the estate. The procedure is concluded upon the provision of the tax statement. The statement shows the tax basis, the tax calculation as well as the legal remedies and payment provisions. It is generally advisable to distribute the estate only after paying the inheritance tax or to set aside sufficient reserves.

The tax rates vary from canton to canton. They are determined by the taxable amount and the degree of relationship. As a rule, spouses, persons living in a registered partnership and their children are exempt from tax in the respective cantons.

If, for example, one cohabitating partner dies with the most recent residence in the Canton of Zurich and leaves the other cohabitating partner all their moveable assets in the amount of CHF 500,000, after taking into account the tax-free allowance of CHF 50,000 an inheritance tax of around CHF 122,000 will be payable in the Canton of Zurich. The situation is particularly extreme in the Canton of Vaud, where there is only a tax-free allowance of CHF 10,000 and progressive taxation is applied having almost confiscatory effect. For cases in which the testator most recently resided in the city of Lausanne in the Canton of Vaud, the effective tax burden would be around 50%.

7. Simplified subsequent taxation in inheritance cases

All cantons in Switzerland have embedded the simplified subsequent taxation of heirs together with non-punishable voluntary disclosure in their tax laws. Simplified subsequent taxation may be requested from the competent cantonal tax authority. In contrast to the ordinary subsequent tax procedure, this procedure only triggers back-taxes and late-payment interest for the last three of the (already assessed) tax periods that concluded prior to the year of death. Taxes that have not yet been legally assessed within the subsequent tax period are corrected accordingly in the ordinary procedure.

Analogous to ordinary non-punishable voluntary disclosure, the simplified subsequent taxation of heirs is subject to the requirement that the tax authority is not aware of any tax evasion, the heirs or respectively the executor or administrator of the estate unconditionally support the tax authority in determining the evaded income and asset elements and they strive to pay the owed back-taxes. Where these requirements are not met, ordinary subsequent taxation applies which may go back ten years.

8. Division of the estate

If there is only one heir, they shall become the sole heir and sole owner of the inheritance at the time the inheritance procedure is initiated (i.e. the death of the testator). There is no need to divide the estate. However, if there are multiple heirs, a community of heirs is established between them until the division of the estate.

The law assumes that the heirs see to the estate themselves and arrange the division of the estate among each other, whether through physical division (division in specie) or through the conclusion of a written distribution agreement. The estate is divided amicably through division in specie or the conclusion of a written inheritance distribution agreement.

Unlike other cantons, the Canton of Zurich does not have its public authorities tasked with inheritance division. The division of the estate requires the consent of all heirs. If the heirs are unable to reach an agreement on the division, each of them may request the division – in some circumstances also by means of a court action for the division of the estate. Nonetheless, before court proceedings are sought, all possibilities to reach an amicable agreement among the parties should be taken. This is because actions on inheritance division are extremely time-consuming and associated with high costs.

9. Inheritances with international relations

International ties and cross-border points of reference that affect inheritance taxes have continued to increase in recent decades. Switzerland has concluded agreements to prevent double taxation in inheritances with just eight other countries. These concern agreements with Austria, Denmark, Finland, Germany, the Netherlands and Sweden, the United Kingdom and the United States. While an agreement was in place between Switzerland and France until 2015, it has since been terminated by France.

Where no such international agreements exist – as is now the case between France and Switzerland – double taxation can only be avoided in the event of a conflict if internal law offers a solution in this context. It is not uncommon for international cases to be subject to double taxation for inheritance taxation. This is partly due to the fact that the points of reference for tax jurisdiction in inheritance taxation can vary in an international context.

10. Summary

The procedure under tax law that applies following the initiation of the inheritance process is complex and should not be underestimated when administrating estates. The more diversified the estate is, the more complex the tax situation can be expected to be for the heirs. Cross-border inheritance cases that involve multiple jurisdictions further complicate the tax situation. Depending on the circumstances, it may be advisable to obtain professional legal assistance in good time in order to administer the estate efficiently and in compliance with the applicable legal regulations.