Inheritance tax planning is a complex area, especially in a cross-border context. There are many factors to consider, such as the tax laws of the countries involved, the domicile and tax residence of the deceased and the beneficiaries, and the location of the assets.

One of the biggest challenges in cross-border inheritance tax planning is double taxation. This occurs when two or more countries try to tax the same assets upon death. Double taxation can be very costly and time-consuming for the beneficiaries, so it is important to take steps to avoid it.

1. How are inheritance/ estate taxes levied around the word?

When exploring inheritance and estate taxes across the globe, you’ll encounter two predominant models:

• Estate Tax Settlement Model: In common law jurisdictions, such as the UK and the US, estate taxes are typically paid from the deceased person’s estate during the probate process. This means that taxes must be settled before the legal title to the property can be transferred to the heirs.
• Inheritance Tax at Distribution: Conversely, civil law countries typically adopt a model where taxes are imposed on inheritance at the moment assets are distributed to the heirs. This means that taxes are paid by the individuals receiving the inheritance, i.e., the heirs.

In Switzerland, inheritance taxes follow a distinct pattern. The cantons impose these taxes, with the majority levying them on the portion of the inheritance or legacy passed on to the beneficiary, referred to as the heir or legatee. However, the canton of Solothurn stands apart, imposing an estate tax on the decedent’s estate itself.

2. Which country may impose inheritance/ estate tax on my assets?

Understanding which country may impose inheritance or estate tax on your assets, precise rules hinge on the tax legislation specific to each country. In broad terms, several factors come into play when considering a transfer of assets upon death:

• Tax residency or domicile of the deceased: The country where the deceased individual was tax resident or had their domicile is often a key jurisdiction interested in taxing the inheritance or estate.
• Tax residence of heirs or beneficiaries: Similarly, the country where the heirs or beneficiaries are tax residents may assert taxation rights.
• Location of assets: Additionally, the country where the assets are located can influence tax obligations.

For instance, in Switzerland, a general rule prevails where worldwide assets are typically subject to inheritance tax in the canton in which the deceased maintained their legal domicile. Notably, immovable property deviates from this rule and is taxed based on its physical location.

When multiple jurisdictions are involved, and their tax rules do not match as described above, the potential for double taxation on the same assets arises. This underscores the importance of meticulous estate planning.

3. Common examples of cross-border inheritance/ estate taxation

Example 1: US Real Estate and US Securities

Inheritance tax rules consider US real estate as a US-situs asset. Similarly, stocks issued by US corporations are treated as US-situs assets, even if held by non-US tax residents abroad. When such assets are owned by non-US tax residents, they are subject to the US estate tax, which can reach rates of up to 40%. Importantly, the US domestic tax law only provides a meager exemption of USD 60,000. Furthermore, there is no automatic exemption on assets passing to a surviving spouse. This means that if a foreign owner of US real estate or US stocks passes away, the value of these assets exceeding USD 60,000 will be subject to the US estate tax at a rate of up to 40%. At the same time, the owner may face potential inheritance tax obligations in the country of their tax residency at the time of death.

Example 2: UK Real Estate

UK real estate is a UK-situs asset, subject to UK inheritance tax, irrespective of the owner’s tax status. The UK levies inheritance tax at a 40% rate on the property’s value exceeding the “tax-free nil rate band” (currently GBP 325,000). Several exemptions exist, with one of the most significant being the spouse exemption, which excludes assets passed from a deceased spouse to the surviving spouse from UK inheritance tax liability. Additionally, the country in which the owner of UK real estate resides at the time of death may assert the right to impose inheritance tax on the individual’s worldwide assets.

4. Is it possible to avoid double taxation?

In cases where assets may be subjected to taxation in multiple jurisdictions, there are two primary methods to prevent double taxation:

• Estate/Inheritance Tax Treaties: The existence of an estate or inheritance tax treaty between the country where the assets are located and the country where either the deceased or the beneficiary resides can provide a vital solution. These treaties outline specific tax treatment and exemptions, offering clarity and potential relief from double taxation.
• Unilateral Tax Credits: Some jurisdictions offer unilateral tax credits, allowing taxpayers to offset taxes paid in one country against their obligations in another. This can be a valuable tool in avoiding double taxation and ensuring that assets are not unduly burdened by excessive taxes.

5. Does Switzerland have double taxation treaties on estate taxes?

Switzerland’s estate tax treaties with eight countries, including Austria, Denmark, Finland, Germany, the Netherlands, Sweden, the UK, and the US, offer substantial benefits.

Take, for instance, the agreement with the US, providing Swiss tax residents with remarkable exemptions from US estate taxes. Article III of the treaty grants Swiss taxresidents an exemption calculated as a pro-rata portion of the exemption given to US citizens (currently, USD 12,060,000) based on the proportion of the value of the US assets subject to the US estate tax to the value of the world-wide assetssignificantly surpassing the US domestic exemption of USD 60,000 for non-residents.

Another favourable treaty, the Switzerland – UK treaty, exempts from inheritance tax in Switzerland immovable property located outside Switzerland.

6. Are there any opportunities for estate/inheritance tax planning?

Consider instruments like trusts, foundations, or personal investment companies, along with traditional tools like wills and life insurance policies. Don’t overlook the strategic value of lifetime gifts or a combination of these approaches. As you delve into your inheritance tax strategy, ask key questions:

• What types of assets are involved (e.g., real estate, securities, property rights, life insurance policies, digital assets)?
• Where are these assets located (situs)?
• What are the nationality, domicile, and tax residence status of the individuals who own the assets and who may inherit the assets?
• What is the marital status of the involved individuals?
• What is the degree of kinship of the owner of the assets and potential beneficiaries?
• What is the ownership structure of the relevant assets (are they held directly by individuals, through a personal company, or through a trust)?

Crafting the ideal inheritance and estate plan depends on the unique mix of the above factors. With multiple jurisdictions in play, complexity can grow.

We can help you assess your current situation and identify tailored estate/inheritance planning solutions, including trust/foundation setup and will drafting, if needed.