Your vacation home abroad: tax law and estate planning

Do you own a vacation home abroad or in another canton? Then you should be aware of these tax and inheritance implications.

For many people, a vacation home is much more than just a place to escape to. It is a refuge full of memories that often holds great significance across generations. This makes it even more important to familiarize yourself with the applicable tax and inheritance regulations and take them into account when planning your finances and estate.

Your vacation home abroad: tax law and estate planning

From a tax and inheritance perspective, owning a property abroad creates a link to the country, in which it is located. In the event of inheritance, oftentimes the laws of this country apply to the property. It is therefore advisable to find out what precautions can be taken early on to simplify the subsequent settlement of the estate.

One way to simplify estate planning could be drawing up a special will that is limited to your assets abroad. This can simplify and speed up the transfer of these assets to your heirs. As a general rule, this process should be clarified with a local legal advisor. It is important that the estate planning in Switzerland does not conflict with the special will abroad. The tax implications should also be considered: real estate abroad may result in a tax upon inheritance. For example, heirs who are exempt from inheritance taxes in most cantons in Switzerland may be subject to substantial taxes abroad.

Making appropriate arrangements early on can often reduce the tax burden on your heirs. This can be done, for example, through a gift with the reservation of usufruct, a sale to your heirs, or a transfer to a family-owned legal entity. From an administrative point of view a transfer during your lifetime is often easier than inheritance. Therefore, a tax consultation should be considered as part of your estate planning.

Your vacation home in another canton: differences within Switzerland

Tax considerations may also play a role in the case of a domestic vacation home. If you own property in a canton other than your canton of residence, an intercantonal tax apportionment takes place. Each canton is entitled to tax the properties located within its territory. However, when determining the tax progression, the entire estate of the deceased is taken into account. In the event of death, this results in a proportional inheritance tax levy per canton.

The intercantonal tax apportionment is particularly relevant if you wish to include a cohabiting partner in your will, as inheritance taxes vary greatly between cantons. In any case, it is worth reviewing the local inheritance tax laws of the applicable canton.

Some cantons still levy inheritance taxes on descendants, albeit at moderate rates. These include Vaud, Appenzell Innerrhoden and Neuchâtel. Depending on the composition of your estate, you may be able to reduce your tax burden by making appropriate arrangements or transfers during your lifetime.

Your options for passing the property down to the next generation

Regardless of your inheritance tax situation, the question will eventually arise as to whether you wish to keep your vacation home in the family or sell it. If you decide to pass it on, you must first clarify whether the property is to be inherited by one heir or more.

Joint ownership by several descendants presents certain challenges: necessary renovations or investments must be decided by mutual agreement. The use of the property must also be coordinated.

If, on the other hand, the property is to be transferred to only one descendant, it must be clarified at what value and at what point in time the transfer is to take place. You should also clarify whether a possible gift must be compensated.  This means that you have to decide whether the child must count the property toward their share of the inheritance when the estate is divided later on.

To ensure that your vacation home is included in your estate planning in accordance with your wishes and needs, please do not hesitate to contact your relationship manager.