Summary of the most important points
- Cases of death lead to both tax demands regarding the tax liability of the deceased person and possibly to tax demands toward the beneficiary in the inheritance case.
- Regarding the tax liability of the deceased, the (mid-year) tax returns as of the date of death and all outstanding tax returns of the previous year must be submitted. In this regard, remember that consultations before death occurs make it easier to fill out tax returns. And, if needed, deadline extensions can be granted on consultation with the competent tax office.
- Toward the heirs, tax demands can accrue through the inheritance tax and, for inherited property, through the property gains tax and property transfer tax. Regarding these types of tax, there are a few cantonal differences regarding possible exceptions.
- Early planning can help avoid tax “surprises”. And appropriate measures can be taken to keep the tax burden as low as possible.
Tax demands after someone dies can be subdivided into two categories: tax demands regarding the tax liability of the deceased person and the tax demands toward the heirs concerning the inheritance.
Tax demands regarding the deceased person’s tax obligation
If someone dies, their tax liability basically expires. But this doesn’t mean the deceased individual isn’t required to pay any more taxes for the current year. For example, there is a mid-year tax obligation of the deceased person for the year of death. Mid-year means that payment of tax is not required for the entire tax year. Instead, income and wealth tax is owed only for the period from 1 January of the year of death until the date of death.
Specifically, the tax liability is limited proportionately to the assets for the specified period and to the income attained in the year of death until the date of death. To determine the tax rate, recurring income (such as wages, retirement, interest and rental income) is projected for the entire year.
If, for example, a person with a monthly income of CHF 4,000 dies on 30 September, only CHF 36,000 (9 x CHF 4,000) is declared as taxable income, but the rate will be based on the theoretical annual income of CHF 48,000 (12 x CHF 4,000).
Collecting this “final tax” is based on the deceased person’s tax returns as of the date of their death. This is not to be confused with the tax inventory, which is particularly used as the basis for establishing any inheritance tax. The final tax returns as of the date of death are delivered by the competent tax authorities at the deceased person’s place of residence. If the deceased person was married and leaves a spouse behind, the tax returns as of the date of death are the final joint tax returns. They will then be filled out by the surviving spouse. For the rest of the year (from the date of death until the next 31 December), the surviving spouse will be generally liable for tax.
If the deceased person was unmarried or their spouse has already died, the tax declaration as of the date of death must be filled out by the heirs. The (last joint) tax returns as of the date of death must be submitted to the municipal tax office at the deceased’s last place of residence and, for property lying outside the canton, to the property municipality as well.
Different cantons have different deadlines for submission. For example: in the canton of Zurich, the tax returns must be submitted along with the inventory questionnaire within 60 days from the date of death, but in some other cantons the time limit is 30 days. It can be extended under certain circumstances. Such an extension is frequently necessary because the documents (especially certificates of inheritance, account statements as of the date of death, etc.) are not available in time. If certain previous years have not yet been definitively assessed, those outstanding tax returns must also be submitted within the specified time limit.
How to prepare
To be better able to fill out tax returns in the event of death, preparatory actions can be helpful. For example, we recommend that heirs learn about wealth and income tax circumstances in advance. And arranging where the documents in question are filed can be especially helpful. In particular, tax returns from previous years can serve as useful points of reference. We also recommend contacting the tax authorities if someone dies, to agree on a deadline extension if necessary.
Tax demands concerning the inheritance
Besides the tax returns as of the deceased’s date of death, the inheritance can also trigger tax demands toward the beneficiary. In an inheritance case, heirs can be affected in three areas as far as taxes are concerned:
- in the form of a general inheritance tax on the accrued inheritance
- through the property gains tax and property transfer tax for heirs of real property and
- in the area of income taxand wealth tax based on increased income / assets.
1. Inheritance tax
All cantons except Schwyz and Obwalden levy a tax on the inheritance (inheritance tax). The heir at the testator’s last place of residence is liable for taxation. If real property is inherited, there is also a tax liability at the place where that property is located. In almost all cantons, however, there are exceptions for the spouses and offspring (including stepchildren and foster children in long-term foster relationships), who are fully or partially exempt from such tax.
The tax burden of the inheritance tax can be reduced if estate planning begins early (see the statements to that effect in “How to save on inheritance and gift tax”). For example, gifts inter vivosoffer a certain leeway for tax savings. Among other things, this allows future value growth to be excluded from inheritance tax, and the tax progression can be broken by dividing the assets. In addition, the tax burden can be lowered under certain circumstances by taking on a mortgage before the property is handed over inter vivos. For example, the debts (mortgage) adhering to the property are deducted from the property’s value for tax purposes. But be aware – you need to clarify the situation in advance to avoid being confronted with the accusation of tax evasion.
We must also point out here that, if there are special circumstances (on a case-by-case basis) affecting the inheritance tax, payment in instalments can be possible. To be sure, ask your local tax administration. In such a case, it is advisable to bring in an expert. You can find suitable specialists in the list of goods and services.
2. Property gains tax and property transfer tax
The property gains tax and property transfer tax are connected with the change of ownership of real property. Since ownership of real property can also be transferred in an inheritance case, this can cause two taxes to become due. The property gains tax taxes the gains achieved through the sale. With the property transfer tax, on the other hand, the tax is tied to the change of ownership (sales price / market price – not the gains – as the connecting factor for the amount of the tax).
As with the inheritance tax, the tax jurisdiction for the property gains tax and the property transfer tax lies with the canton in question. In these areas, this also leads to cantonal differences. But in all cantons, property gains tax is deferred if ownership changes through inheritance. This means that the property gains tax is due only if the property is resold. That being said, in many cantons the deferral is subject to certain requirements. Property transfer tax differs more widely from canton to canton. For example, the cantons provide for various exceptions or reductions of the tax burden during an inheritance (an overview of the Swiss Federal Tax Administration in this regard can be found here beginning on p. 13).
To prevent heirs that take over the real property from being disadvantaged, any future property gains tax and property transfer tax should be considered when the inheritance is distributed.
3. Income and wealth tax on the heirs
Heirs are affected by both direct tax consequences (in the form of inheritance, property gains, and property transfer tax) and indirect tax consequences. An inheritance can increase the heirs’ assets as well as their income (assets bequeathed through earnings, for example). These assets and this income are declared in the heirs’ tax returns from the time of death onwards – first, as a share in the undistributed inheritance, and, after the estate distribution, as each heir’s own assets / earnings. This can result in a higher tax burden and, under certain circumstances, a higher degree of tax progression.