The Swiss will cast a public vote on whether to introduce the first ever federal inheritance tax. This will be a levy on inheritance and donations for high-net worth individuals. The proceeds will be used to combat climate change. This raises questions on whether the vote will end up increasing tax revenues, drive wealth away or be mired in legal uncertainty.
To date, inheritance tax in Switzerland is only paid at the canton level. A yes vote on 30th November would mean that the heirs of estates worth more than CHF 50 million (54 million euros) would have to pay tax on 50 percent of their assets above this value.
The initiative was proposed by the youth wing of the Social Democratic Party. They say the tax will affect up to 2,500 taxpayers and deliver CHF6 billion in additional revenues each year.1 This is contested by revenue estimates from the Federal Council, which are based on a study conducted by Marius Brülhart, Professor of Economics at HEC Lausanne.2
“For heirs of very large estates, the federal tax will be a massive jump from close to zero to up to 50 percent. In recent history, there is no precedent for this. From existing evidence I expect a substantial mobility response by those affected. There’s a realistic possibility that this will be so strong that even though there’s a tax hike, total revenues could fall,” explains Brülhart. His estimates range between a net loss of 0.7 billion CHF and a net gain of 0.3 billion CHF. 2
This is because older high-net-worth individuals may decide to leave Switzerland or choose not to settle in the first place. According to Brülhart’s estimates, up to three-quarters of these individuals may move their tax residence abroad. 2
“The top fifth of the people affected possess two thirds of the wealth of the whole group. So even within these very rich people, the very richest of the rich have a disproportionate share. In essence, the proposal targets individuals who rank on the country’s rich list, and the evidence shows such people to be sensitive to inheritance taxes” states Professor Marius Brülhart.
“The proposal’s likely defeat, however, should not put an end to discussions on a revival of inheritance taxation. It’s one of the only taxes that doesn’t penalise one’s own economic effort, entrepreneurship or labour supply. Indeed, our recent research shows, that inheritances are often used to fund reductions in labour supply, especially through early retirement. An inheritance tax could counteract that effect to some extent.”
He continues: “Given the pressures on public finances, for the government to rule out inheritance tax as a source of additional revenue would be a lost opportunity. In contrast to most other types of taxation, a modest increase of this tax, say to where it was 35 years ago, would be very unlikely to have negative economic side effects.”
There are also legal uncertainties. The proposed tax will be based on a law that will have to be enacted within three years. But the levy will have retroactive effect from the date of the vote. This legislation will also have to introduce rules to combat tax avoidance in connection with emigration.
“Legislation with retroactive effect is always delicate from a legal point of view. After an initial phase of great uncertainty the government has clarified its position saying that if there is a yes vote it will not adopt a retroactive effect regarding the consequences of emigration. It means that if you leave Switzerland on 1st December there will be no consequences,” states Pierre-Marie Glauser, Professor at the Business law and Tax department of HEC Lausanne. However, the tax will be due retroactively in case of death or gifts before the law is written into the Constitution.
Another area that is unclear is what anti-avoidance measures the federal government will take with respect to those who plan to leave Switzerland, once the law is adopted. The government do not intend to take away people’s passports if they have more than CHF 50 million.
“They will still have to respect free movement. But specific measures will have to be discussed in the context of persons transferring their residency out of Switzerland. This will reduce the country’s attractiveness,” says Glauser.
He adds: “The other big issue is that you have no exceptions for family businesses, which includes many key corporations. Think about family owned companies in watch or machinery industries. These may have a high value above CHF 50 million, but they may not have huge amounts of cash. On the death of the shareholder, the family may be forced to sell up to pay inheritance tax. Selling these vital businesses to say private equity firms or global competitors could be very problematic for the economy. Finally, the cantons will certainly continue to levy their own inheritance taxes; this could lead to very high tax burdens, even above 50%.”
References:
- Impôt sur les successions et les donations, Swiss Federal Department of Finance, Accessed November 25
- Impôt fédéral sur les successions selon, Analyse à l’intention de l’Administration fédérale des contributions, Marius Brülhart, October 2024
