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Nowadays the world’s economics and politics do not, perhaps, invite to the purchase of Swiss freeholds for the simple joys of sun and snow, as they did in the enthusiastic heyday of the early '80s.
Nonetheless, whether they are lovers of the Alps or not, good reasons can be shown for the HWI to consider such an acquisition now:
- both as a hedge investment, and
- as a route towards very favourable fiscal treatment on retirement, however far off that may be.
Which are the pros, in today’s market, of the acquisition of a Swiss freehold as a hedge investment?
The Acquisition of Swiss Freeholds
Transfer of Residence on Retirement to Switzerland
Exit from the UK
Residence in Switzerland
The Acquisition of Swiss Freeholds
In a changing, uncertain and inflationary world the first consideration for anyone examining their own portfolio must be, no doubt, to cover foreseeable commitments in one’s own domestic currency from domestic assets. Thereafter the investment of the remaining "back-stop" money is likely to be subject to three main criteria:
- degree of risk,
- nature of the asset, and
- currency of investment.
The risk decision is almost bound to be for sound, defensive positions which will survive "the slings and arrows of outrageous fortune", and where values can be expected to move with inflation.
Historically, well situated and well constructed real estate has always maintained a steady, inflation proof growth in intrinsic value over the long term. The problems have arisen when the owner, encumbered by debt or otherwise, has been unable to hold until the favourable moment to sell arrives. In the case of "back-stop" money, this should not be a problem.
Property markets world-wide are in some disarray these days. Switzerland is no exception. A decision to invest will assume that inherent values will re-establish themselves over the 5-10 year period for which a non-resident must retain a Swiss freehold before on-sale.
The future of currencies is always notoriously hard to foresee. But the determination and single mindedness of the Swiss provide a strong point to the long range containment of inflation and the consequent maintenance of values in the Swiss Franc versus other currencies.
So, in general terms, a good Swiss freehold would seem to meet the criteria likely to be set for a well spread, long range, defensive back-stop portfolio.
How can a Swiss freehold be put to good use in terms of retirement and inheritance?
It is not widely known that, for a substantial fortune, retirement to Switzerland can offer major advantages in terms of:
- avoidance, by transfer of residence before encashment, of accumulated capital gains tax on assets built up over a working lifetime,
- low average taxation rates thereafter, and
- flexible, low cost inheritance provisions.
This subject is treated in detail under "Transfer of Residence on Retirement". It is there emphasised that one of the essential pre-conditions to the negotiation of an individual retirement tax treaty, is that the applicant must show that he has had strong connections with Switzerland prior to his decision to transfer residence.
The acquisition of a Swiss freehold, well in advance of the fact, is powerful evidence in this regard.
In short, while today's taxation and residence rules may well change - provided a Swiss freehold is seen in any case as a sensible diversification investment - the retirement options which it can carry with it are a very attractive bonus which may be wise to acquire.
With this train of thought in mind, P.d.P. Portatrice di Prosperità SA has established a strong working relationship with some Swiss Property Development Groups in Villars, Crans sur Sierre, Davos and St. Moritz. They look after properties in all aspects, from their building and completion to their after-care and subletting and, if necessary, their re-sale. They are in addition extremely agreeable and efficient people who speak excellent English.
Villars and Crans sur Sierre are indeed a place in which the traditional joys of sun and snow are to be found in abundance. With their matchless views across the Rhone Valley, the villages stand perched above the sophistications and lake side life of Montreux and Lausanne, about an hour and one a half away from the international airport of Geneva.
Here, with 1’000 kms of skiing on the doorstep and two fine golf courses, we have created a selection of interesting freehold options, all of which form part of the diminishing quota of new apartments available for the non-residents.
It should of course be emphasised that property in Switzerland is not cheap. For Properties put forward by developers one should count on a purchase price of between SWF 6’000.00 and SWF 10’000 per sqm. On the face of it this compares unfavourably with, say, France but
- quality and finishing are outstanding,
- the diminishing number of freeholds available to non-residents has to put a scarcity premium on their value as time goes by, and
- the add-on values of the country's cleanliness, beauty, safety and security must be factored into the price.
One must also recognise that there are limitations on what a non-resident can buy. For instance, except under very special circumstances, one can no longer acquire a chalet. It has to be an apartment and the size limitation per owner is of the order of 100 sqm. However, there are solutions under which, by grouping buyers from the same family together a more spacious area can be achieved.
In short a freehold investment in Switzerland is a serious, long-term decision involving anything from £ 125’00 to £ 300’000.
Switzerland and its stability in all respects, from its political and economical solidity to the renowned Swiss reliability in every day’s matters make a second home in Switzerland a pleasure rather than a burden, a fact which deserve the proper consideration.
And particularly so for the individual who looks prudently forward to the merits of a well planned retirement.
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Transfer of Residence on Retirement to Switzerland
The economic and political future of the UK or USA and other countries is sufficiently uncertain for HWl's to wish to consider all reasonable steps to protect the option to emigrate on retirement, both to obtain tax efficiency during their lifetime, and to provide descendants with freedom of choice as where to take their inheritance and lead their lives later on. Such a prospect becomes particularly attractive if:
- The retirement destination is close, efficient, beautiful and cosmopolitan,
- Wealth can be exported from the UK and USA without suffering penal taxation on transfer, and
- Taxation in the new place of residence is low
Switzerland is a highly desirable retirement destination in which, under present rules, all three objectives can be achieved, provided the HWI can demonstrate a close affiliation with Switzerland which pre-dates his application by a number of years.
The HWI to whom Swiss retirement may appeal is likely to have:
- A fortune of say SWF 5 million plus, made in the last 10 years from the sale of his business,
- A substantial part of his wealth in assets which, if he remains ordinarily resident in the UK, will suffer:
- Capital Gains Tax on conversion into cash, and
- Inheritance Tax.
- The wish to switch from day-to-day employment to "deals" and management of assets,
- A young family, and mobility of mind and funds.
Retirement to Switzerland on the best available terms requires good legal and tax advice in the UK or USA and negotiation in Switzerland by specialists who are familiar with all aspects of the applicant's case and are recognised by the Swiss federal and cantonal authorities.
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Exit from the UK
The first step for the HWI is to become "ordinarily resident" outside the UK. To do so one has to demonstrate adherence to the following conditions at least:
- one intends to reside abroad permanently,
- has established a "real" residence elsewhere, and
- has no accommodation available in the UK.
Once an "ordinary" residence elsewhere has been established (which can take place within a tax year):
- UK taxation ceases to apply (other than in respect to income sources in the UK or earned for services rendered there),
- Assets (cash; stocks; the benefit of Life Insurance, Pensions, BES and PEP schemes; ownership of property etc.) can be transferred abroad without tax penalty, and in principal,
- UK Inheritance Tax no longer applies.
The individual concerned is, however, precluded from spending more than 90 nights per annum in the UK.
A return to the status of an ordinarily resident in the UK is usually possible after 4 tax years without retrospective tax consequences.
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Residence in Switzerland
Application can be made either for:
- Permission to reside and work in the canton of choice, or
- Permission to reside there without gainful employment in Switzerland.
Unless the applicant is taking over a Permit granted on an on-going basis to an existing organisation, it is difficult for a foreigner to obtain permission to work in Switzerland. The pre-condition for so doing is that the applicant shows that he will be creating significant new employment in a manner approved and desired by the canton. Each case stands on its own feet. There are no ground rules.
This paper applies to those who wish to reside in Switzerland without gainful employment there. Normally applicants are over 60 and have retired from active work. But the procedures are the same if the applicant is younger.
Basis of application
Acceptance has to be negotiated at the Federal, Cantonal and Communal levels of government. Pre-conditions of Federal acceptance are that:
- The applicant can cite "good motives" for wanting to live in Switzerland,
- He has no gainful employment there, and
- He has or will rent a "real" home which is in keeping with his income and which will be his principal place of residence.
Thereafter the over-riding consideration is whether it is good "fiscal business" for the canton and commune in question to accept the applicant. As a rule if his declared income is less than SWF 200’000 per annum the application will fail. If it is between SWF 200’000 - 500’000, the outcome is unpredictable. If it exceeds SWF 500’000, the chances are favourable.
It must be emphasised that each application is judged on its own merits. Adherence to the above parameters does not guarantee success. This will depend as much upon the overall view taken by the authorities at the time as on the facts. The manner and channel of presentation will be critical.
Good Motives
It is critical to be able to argue "good motives" for wishing to come to Switzerland other than monetary advantage. A Swiss family or strong business connections can build the necessary case, as can the ownership of Swiss property. This is the area in which the right advocate with the right connections can be most helpful.
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The Permit
Application is made by a lawyer specialised in the field. He will require a Power of Attorney to act for the applicant. Negotiation will take 4 - 6 months. In a straightforward case fees might be in the order of SWF 10’000.00 - 15’000.00.
At first the applicant will be granted a Permit "B". Given good behaviour this is renewed - for all practical purposes - annually and automatically. While the Permit "B" rules, the applicant cannot buy property and must reside in the canton of application.
A Permit "C" is granted after a period which depends upon nationality. For UK nationals the period is 5 years. With a Permit "C" the applicant is treated exactly as a Swiss citizen except that he cannot vote and is not liable for military services. He can buy property and live where he likes. The permit allows wife and children to enter the country with the applicant. A mistress and illegitimate children may be allowed, provided they are living as a family with the applicant.
Taxation
In Switzerland the income is taxed at three levels - Federal, Cantonal and Communal. There are also cantonal and communal taxes on assets. The percentages vary widely between cantons and communes. Here are some examples of normal taxation for a married couple living in one of the principal canton’s main towns:
| Canton |
Geneva |
Ticino |
Valais |
Zurich |
| Town |
Geneva |
Lugano |
Sion |
Zurich |
| Combined taxation as a % of: |
| Income of SWF 200’000 |
30.3% |
32.5% |
28.2% |
– |
| Assets of SWF 1 million |
0.55% |
0.44% |
0.52% |
– |
(rates are considerably lower in areas outside the main centres)
Rates of this nature will apply to those acquiring permission to live and work in Switzerland. However for those who apply for residence only, much more favourable arrangements can be made via a private tax treaty known as "impôt a forfait".
The procedure is as follows:
- The applicant determines a level of assets and income which he will declare on entry. These have to be sufficient to support his application. Declared income cannot be less than 5 times the rental he intends to pay.
- The tax treaty is then negotiated with reference to these figures. It provides for a fixed amount of annual taxation, which is far lower than the normal rates. The treaty is valid for 3 years. It is then automatically renewable on the same terms - subject to an inflation factor - provided the applicant's permit remains valid.
- The fact that the applicant may have other assets and income which are not declared is recognised and perfectly legal.
The following table shows some current examples (1990). It must be emphasised however, that each treaty is a special case.
| Declared: |
| |
| Assets |
SWF 5 million |
SWF 7 million |
SWF 10 million |
| Income |
SWF 400’000 |
SWF 500’000 |
SWF 750’000 |
| Income of SWF 200’000 |
30.3% |
32.5% |
28.2% |
| Assets of SWF 1 million |
0.55% |
0.44% |
0.52% |
| |
| Federal, cantonal and communal taxation normally applying: |
| Fribourg |
SWF 181’000 |
SWF 233’200 |
SWF 329’100 |
| Geneva |
SWF 214’000 |
SWF 283’700 |
SWF 410’600 |
| Ticino |
SWF 169’000 |
SWF 220’000 |
SWF 340’500 |
| Zurich |
SWF – |
SWF – |
SWF – |
| |
| Fixed taxation agreed by individual treaty: |
| Fribourg |
SWF 85’200 |
SWF 127’900 |
SWF 166’800 |
| Geneva |
SWF 89’000 |
SWF 142’700 |
SWF 191’900 |
| Ticino |
SWF – |
SWF – |
SWF – |
| Zurich |
SWF – |
SWF – |
SWF – |
The Tax paid on the declared income is recoverable under the Swiss Double Taxation Agreements, a deduction further reducing the net tax bill.
Assets and income which are not declared are normally sheltered in a zero tax jurisdiction - a practice which, it is emphasised - is perfectly legal.
Taxation on the overall fortune becomes, in consequence, very modest and attractive.
Trusts of the Anglo-Saxon type - such as those ruling in Liechtenstein - have no legal recognition in Switzerland and therefore cannot be taxed. There is no capital gains tax (other than on property) except in the cantons of Basel, Jura and Grisons; and at communal level in Zurich and Zug.
Property
A non-resident acquiring a Swiss freehold is restricted in his choice and normally cannot acquire more than 100 sqm.
A Permit "B" holder cannot buy. However, it is possible for him to book the purchase of a property of any size in the canton of his choice at the price ruling at the time of entry, with rental paid while the Permit "B" rules. The sale is completed on receipt of the Permit "C".
Gainful employment outside Switzerland
Provided business activity is of an off-shore "deals" or supervisory nature and does not suggest that the Swiss residence is "unreal", it is tolerated. A convenient vehicle for such operations is often an off-shore zero tax corporation which is subsidiary to a Liechtenstein Trust.
Management of the applicant's own portfolio of assets is not counted as gainful employment.
Wills and Death Duties
A British citizen domiciled in Switzerland may elect to draw his will under the English or Swiss law, or under both. Under the Swiss law there are strict provisions concerning the inheritance entitlements of the testator’s family. He may not dispose freely of his estate. Swiss death duties depend on the canton, but they are between 4 - 8% for family inheritors, rising to 15 - 16% for others. Fribourg and Valais are particularly favourable.
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