Disclaiming an inheritance and subsequent donation for tax avoidance

If a descendant or parent inherits, there is generally no inheritance tax in most cantons. However, if siblings are to inherit, it usually becomes due. The same applies to gift tax. If siblings waive their inheritance in favor of their parents, only to receive it from them later as a tax-free gift, this constitutes tax avoidance.

Inheritance taxes are regulated by the canton and are levied when the estate is transferred to the heirs or legatees. Whether inheritance tax is raised depends on who inherits. Spouses and persons in registered partnerships, as well as descendants, stepchildren or foster children are usually exempt from tax. However, the decision on this and the amount of the inheritance tax is left to the cantons. The amount of the inheritance tax is calculated based on the value of the transferred assets. The decision whether to levy taxes on a gift also falls within the competence of the cantons. They determine who has to pay gift taxes and how much these are. For example, in the canton of Aargau, the parents and descendants of the deceased or donor are tax-free. However, the siblings of the deceased or donor have to pay inheritance and gift taxes between 6 % and 23 %.

This difference was exploited by a taxpayer in the canton of Aargau, whose case (BGer 2D_40/2016) eventually ended up in the Federal Court. The brother of the taxpayer passed away in December 2007 leaving behind a construction business. The heirs were the mother of the deceased as well as his brother, who however renounced his half of the inheritance amounting to 685,490 Fr. in January 2008. This then fully went to the mother, who does not have to pay inheritance taxes in the canton of Aargau. In the following months, she made gifts totaling 723,613 Fr. to her son, who had renounced the inheritance. Gifts to descendants in Aargau are also tax-free.

However, the Cantonal Tax Office Aargau did not agree with this. It saw this as tax avoidance, whereby the taxpayer had saved 112,752.80 Fr. (16.45% of his share of the inheritance) in inheritance taxes and therefore assessed him for this amount. The taxpayer took the case further to the Special Administrative Court of the Canton of Aargau and to the cantonal administrative court, both of which agreed with the tax office. The taxpayer also failed at the Federal Court, as it confirmed the previous instances. Tax avoidance is present when (1.) the chosen legal arrangement is unusual, inappropriate or peculiar, (2.) it is assumed that the chosen legal arrangement was abusively selected only to save taxes, and (3.) the chosen procedure actually leads to significant tax savings. All three criteria are to be affirmed in the present case.

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