Donation of property: how does a donation work in Switzerland and what are the advantages?

Is it a good idea to give a property to your heirs? The law is clear on this subject: anyone is free to transfer one or more properties to their legal heirs or to third parties, during their lifetime, rather than leaving their estate to be governed by legal machinery. This is a solution for supporting a family member, favouring an heir, or simplifying your estate. How does a gift of real estate work and what are the advantages of this practice? FGP Swiss & Alps can help you find out.

What is a gift of property?

The principle of a gift is to leave part of one’s estate to others during one’s lifetime: one’s legal heirs and/or third parties. When the gift is a property (house, flat, building, land, etc.), the beneficiaries become full owners… provided that they have given their consent. This is because the gift is a contract, not a unilateral act: the donor and the donee must agree on both the purpose of the gift and the terms and conditions.

Because it must be authenticated, a gift of real estate is made by a notary who draws up a deed. The designation is sent to the Land Registry, then to the tax office in the district concerned, and then to the cantonal tax administration, which calculates the amount of tax, if any.

It is important to note that only property that is the full property of the donor can be the subject of a gift. This excludes property that is under sequestration or seizure, owned by a bankrupt person, or that is subject to a matrimonial regime of community of property (in which case the agreement of both spouses is essential).

Why donate a property?

Unlike wills and inheritance agreements, gifts take effect as soon as the contract is signed. The property is transferred immediately, during the donor’s lifetime, to the beneficiary or beneficiaries, who can dispose of it without waiting. In this sense, the gift of property offers a number of advantages:

• You settle your estate in advance. This avoids potential complications when it comes to allocating assets to the various heirs. It is also a way of ensuring that they remain part of the family, by avoiding the risk of a judicial division and forced sale. However, to further reduce the chances of a dispute, it is advisable to put the gift in writing.
• You assume the costs arising from the transfer of ownership, in place of the future heirs. This only applies, of course, to taxable gifts.
• You allocate your assets in accordance with your children’s needs, in particular to give them a helping hand if they are struggling to find a place to live.
• You give yourself the option of preserving resources, for example by reserving the usufruct or by providing for the payment of a life annuity. In the first case, you can continue to enjoy the home while being assured that the estate will be managed according to your wishes.
• You benefit from tax advantages. In most cantons, gifts are taxed in the same way as inheritances. In practice, this means that a donation of real estate in the direct line (to descendants or a spouse) is tax-free in the vast majority of cantons. In some cases, stepchildren and foster children benefit from the same rule – at least in cantons where they are considered biological children. In the canton of Fribourg, ascendants are also covered.

How are gifts of property taxed?

A gift is taxed in the same way as an inheritance. However, gift tax is not levied at federal level: it is a matter for the cantons and municipalities. Each canton therefore adapts the tax rules as it sees fit, although there are a few main provisions that apply everywhere:

• Duties on gifts of real estate are levied in all cantons, albeit with different rules. An exclusively cantonal tax may also be levied.
• The rate of tax is progressive and varies according to the amount of the gift and the degree of relationship. The closer the relationship, the lower the rate.
• When calculating tax, the market value of the property is (in principle) taken into account.
• The place where the tax is levied is the place where the property is located.

These duties are payable by the beneficiary of the gift.

Spouses and direct descendants are exempt, with some exceptions (the canton of Neuchâtel taxes gifts to descendants at a rate of 3%).

What are the risks of donating property?

The principle of donating property therefore offers many advantages at every level. However, it is important to bear in mind the risks involved. As the donor, by choosing to pass on a property during your lifetime, you agree to relinquish ownership of it: you lose your right of ownership, except in the case of usufruct or a right of habitation.

What’s more, a gift can have unexpected consequences. Firstly, because it can result in an imbalance between heirs of the same rank: for example, a donee, if he is a legal heir, will see his inheritance added to the property that has been passed on to him – at the expense of the others. Secondly, because the situation of the heirs may change significantly between the date of the gift and the date of the inheritance: a marriage, a birth, a death, etc.

All in all, a property donation is an advantageous but complex process that requires careful guidance. Don’t hesitate to ask your specialist broker for advice.