Secondary residence: Switzerland or France?

Buying a second home: in Switzerland or France?

Since 2020, the pandemic and health measures have revived interest in purchasing a second home, reflecting a legitimate need to escape at a time when our individual freedoms are severely shaken up.

People residing in the Lake Geneva region often ask themselves the question of choosing between an acquisition in neighboring France or Switzerland. Notwithstanding questions of personal preferences and price, the question of the total tax burden between these two countries arises.

Therefore, it seemed appropriate to us to carry out a comparative analysis, carried out jointly by Avacore Family Office, a company specializing in Franco-Swiss wealth advice, and Impact Financial Engineering, specializing in advice for Swiss residents, over a long-term period which includes inheritance aspects, which are particularly sensitive for France.

The tax impacts depend on the situation of each household, we have made the following hypotheses:

Initial situation:

1. Couple married under Swiss legal regime, both born in 1966 (55 years old), residing in Geneva, for rent.
2. The couple has two adult and financially independent children.
3. The couple receives a net annual income of CHF 230,000.-
4. Following an inheritance, the couple has a movable fortune placed on the financial markets of CHF 2,650,000.-. Added to this are their pension assets estimated to date at CHF 1,350,000.-
5. The spouses' lifestyle is around CHF 210,000.- per year, tax charge included.
6. Their taxable income amounts to CHF 210,000.-

Acquisition project: comparison retained

1. Joint purchase of a chalet or apartment in Montana (Valais) or La Clusaz (France) for the price of CHF 1,600,000.-.
2. Financing by equity up to 40% (CHF 640,000) and by debt for the balance (CHF 960,000) at the rate of 1% over a period of 15 years.
3. The estimated rental value of the property in La Clusaz is CHF 5,000.-pa compared to CHF 15,000.- for the Montana property.
4. For both properties, we retain an annual maintenance charge of CHF 10,000.-

Comparative taxation: elements that come into play

1. Acquisition costs (notary, land register, etc.)

Montana:        CHF 60,000 (3.8%)

     La Clusaz:      CHF 113,000 (around 7% excluding mortgage guarantee fees)

The difference against France is CHF 53,000.-

• Property taxes

Montana: No special taxes other than those linked to current taxation

La Clusaz: CHF 2,200.- /year property taxes & housing tax

The delta against France is CHF 2,200.- /year.

• Current taxation (income & wealth)

Montana : rental value tax: CHF 15,000.- multiplied by the couple's marginal tax rate.

La Clusaz: the French rental value only has an impact on the marginal tax rate in Switzerland. In other words this rate will be set on the basis of taxable income "virtually" increased by CHF 5,000.-

Given the fact that real estate located in France would not be taxable in Switzerland (neither on wealth nor on income), but only taken into account for the rate, the acquisition of the property in La Clusaz would result in lower net taxation of some CHF 5,700.- per year.

This advantage will, however, decrease from 2035, the year during which the couple will be subject to the IFI (Real Estate Wealth Tax, which results from a fictitious amortization of the debt calculated from a tax point of view, whether the latter is actually amortized or not) and will stand at around CHF 1350.-pa from 2038.

• Inheritance taxes (direct line) with Swiss legal devolution to 1^er death

       Montana:        None (if purchase in Vaud inheritance tax of around 7%)

      La Clusaz:      CHF 223,000 or CHF 64,000 if dismemberment of property upon acquisition.

Comparison table:

We note the following elements:

• Acquisition costs are much higher in France than in Switzerland.
• The annual tax charges linked to the ownership of the property are higher in Switzerland than in France.
• Inheritance taxes are particularly penalizing in the case of France in the absence of anticipation.
• Note that with succession planning for France (see below) the cumulative tax differential falls to around CHF 11,500.-A negligible amount, especially since it is projected at 30 years.
• Note that the financing structure (mortgage debt) has little impact on the tax burden differential. From an economic point of view, however, the latter is important, the debt implying an interest charge, but also the possibility of placing part of one's capital elsewhere than in real estate. The question of financing in CHF or in € will also arise in the case of a purchase in France, which amounts to a choice between security of interest coverage (if debt in CHF) versus management of exchange risk (if debt in Euro) for property held in the Euro zone.

Possible optimization measures

Purchase in Switzerland:

Few specific means exist to reduce the tax burden. We could cite the purchase of a property requiring some maintenance work which will be tax deductible, or a debt amortization strategy through a repurchase program in the second pillar or third pillar savings. But such strategies should anyway be integrated into good wealth advice, whether the couple owns a second home or not.

We will also remember that a purchase in the Vaud mountains is (fiscally) more expensive than in Valais, both in terms of rental yield and inheritance tax.

Purchase in France:

A debt taken out to finance the acquisition will be deductible from the taxable base of inheritance tax (as in Switzerland), if it still exists at death, that is to say if it has not been reimbursed and if insurance death has not been taken out.

A donation in bare ownership would reduce the taxation of the transfer. The rights are, in fact, based solely on the value of the bare ownership which depends on the age of the usufructuary at the time of the donation, for example 50% for a usufructuary aged 55. The usufruct will expire upon the death of the usufructuary without taxation. It must nevertheless be considered with caution because the usufructuary can no longer sell the property without the agreement of the bare owner.

Conclusion:

Over time, inheritance taxes are against an acquisition in France. We could nevertheless analyze it as the counterpart to the fact that for the same budget, we will often be able to buy in France a property with a larger surface area than that which we would have in Switzerland. Furthermore, our example shows that anticipating the transmission can reduce the bill substantially.

As in any major project, the financial and tax implications depend on numerous parameters which go well beyond aspects strictly linked to the property considered. It is therefore recommended to include such an acquisition in overall wealth planning based on the advice of a specialist.

We warmly thank AVACORE with whom this article was co-written.