Killing the golden goose…

Below is a translation of an article included in the latest edition of "Les 4 saisons - BR & H Finance" sent mid last week. In this edition, we also reflect on the 25th anniversary of the release of The Matrix and on the long lasting investment lessons from Benjamin Graham.

After reading this article in Les Echos about the initiative to tax inheritances in Switzerland, we felt it was essential to weigh in on this sensitive topic. We have based a lot of the following post of a study published by PwC (english version)

Context of the Initiative

The Swiss Socialist Youth (Juso) has collected 130,000 signatures in support of a popular initiative (please note that the word "popular" in this instance doesn't signify that the Swiss population is in favour of it !) that proposes a 50% tax on inheritances exceeding 50 million Swiss francs. This proposal reflects a growing trend toward imposing confiscatory taxes on large fortunes. With a 50% tax rate, Switzerland would surpass most countries in terms of inheritance tax. To put things into perspective, France, often seen as a stronghold of high taxes, would suddenly appear "competitive" with its lower rates and various tax loopholes, such as the Dutreil pact, exemptions for works of art or businesses owned and worked at (l'outil de travail), mechanisms absent from the Swiss project.

Constitutional and Practical Implications

The proposed law includes a clause stating that any person residing in Switzerland at the time of the vote, and potentially subject to this tax, could no longer escape it, even if they moved abroad after the vote. This clause raises important constitutional questions and could lead to absurd situations: For instance, please imagine the United Arab Emirates collecting an inheritance tax on a Swede who died in Dubai but was living in Switzerland at the time of the vote, while his heirs live elsewhere!

Impact on Businesses and Property

Even more concerning is the potential impact on Swiss entrepreneurs and property owners. For these individuals, a 50% inheritance tax could destabilize the transfer of family businesses and valuable real estate, creating situations where heirs would be forced to sell assets just to pay the tax.

The Legislative Process

The Swiss Federal Council has already reluctantly agreed that this initiative be debated at the Parliament.

Now, for this initiative to succeed, it must first be approved by Parliament, where it will be decided if it can be put to a public referendum. Then, it will need to be accepted by a double majority of both the people and the cantons. The parliamentary discussions will begin next year and could last up to 18 months, with a referendum expected in 2026 if the proposal moves forward. This sword of Damocles will be hanging over us for quite some time…

Reactions and Outlook

According to polls, 78% of those potentially affected by this tax are already considering all their options, including moving abroad. This raises concrete questions, particularly concerning high-value properties like chalets in St. Moritz near the Suvretta Hotel, often valued well above 50 million Swiss francs.

Findings from PwC’s study include:

• Insufficient financial means: 8 out of 10 individuals would not have enough liquidity to pay future taxes.
• Risk to the Swiss economy: 2 out of 3 family businesses would either no longer remain – or only partially remain – in family hands.
• Moving abroad: 78% of those affected are already considering relocating abroad or transferring their wealth early within the family.

Swiss Pragmatism in the Face of Legislative Uncertainty

The Swiss people are known for their pragmatism, and while the chances of this proposal becoming law are slim, they still exist. Even a small probability forces those affected to prepare for this possibility. Moreover, this initiative could deter those considering moving to Switzerland, pushing them toward currently more welcoming jurisdictions like Italy or the UAE. In the end, this initiative raises not only questions of tax fairness but also about Switzerland's attractiveness as a destination for large fortunes, a debate that could reshape the country’s tax landscape.

Fighting this initiative is our duty; Switzerland’s attractiveness depends on it.