Transferring home ownership to the children – what needs to be taken into account.
Will the big family home and garden eventually become too much for you? Could your children make better use of the space? This is why many testators decide to pass on their property to their descendants during their lifetime. Three ways to transfer home ownership to your children.
Transferring home ownership to the children. Three options.
For example: you have three children. One of the three children assumes the property.
1. Sale at market value
Although not an inheritance, one option is to sell your house to one of your three children at the market value, in other words, the value at which the property would be offered for sale on the open market.
Example calculation
The market value of your house is CHF 1,000,000. The mortgage your child assumes is CHF 400,000. This means that there is still CHF 600,000 to be paid. Your child can now either pay the CHF 600,000 from savings and an increase in the mortgage. Or you can grant them a loan of CHF 600,000 for the purchase of the house.
Impact on inheritance
Since the market value of the property has been paid, there are no inheritance obligations – neither for you nor for your child. Furthermore, you remain financially stable enough to cover any care costs in old age. Please note that as a seller you will have to pay a real estate gains tax. Some cantons also have a real estate transfer tax.
2. Sale below market value (advancement)
You transfer the house to one of your three children at the actual market value upon the agreement that the difference shall be taken into account later in the inheritance.
Example calculation
Your house has a market value of CHF 1,000,000 with a mortgage of CHF 400,000. However, you sell the house to Child A only at a reduced price of CHF 700,000. Your child takes over the CHF 400,000 mortgage and pays you the remaining CHF 300,000.
Impact on inheritance
Consequently, your child is discounted a sum of CHF 300,000, or, legally speaking, they receive an advancement (advance inheritance). In case of your death, this amount will be offset by Child A as an advance on their share of inheritance. They must then compensate their two siblings, each of whom are entitled to CHF 100,000 more in their inheritance.
Any increase in the value of the property between the date of the advance inheritance and the date of death must also be compensated. If the property is worth CHF 1,000,000 when it is handed over to the child, but CHF 1,200,000 at the time of your death, that equates to CHF 200,000 difference. Child A must therefore add a further CHF 200,000 to the balance in the inheritance, making it a total of CHF 500,000. The entitlement of the other two siblings is increased by CHF 66,667 (CHF 500,000 / 3 = CHF 166,667).
However, parents have the option to prevent this. This is done by stating in a notarized assignment agreement that in the event of inheritance no compensation must be paid on the increase in value. An exemption from the compensation of the increase in value can also be made in a will.
3. Transfer without later compensation (gift)
With a partial or a complete gift, you transfer ownership of the property to one of your children without the child having to offset the gratuitous portion in the inheritance along the line.
Example calculation
You transfer ownership of your house worth CHF 1,000,000 to Child A. In return, the child shall be liable for the CHF 400,000 mortgage. They agree that the difference of CHF 600,000 to the market value is considered as a gift and is not part of their inheritance.
Impact on inheritance
Upon death, Child A does not have to compensate their siblings for the CHF 600,000 including the added value of the property at the time of death.
Please note: In the case of advancement, and in particular in the case of gifts, it must be ensured that compulsory portions of the other children are not violated. In addition, it should be considered that parents could become financially dependent on their children with the partial or total transfer of the house without compensation. This may then mean that they are unable to pay any high care costs themselves in old age.
Transferring home ownership to your child in the case of care
Many homeowners fear having to sell their homes in old age in order to pay for expensive nursing homes. In order to prevent this and to preserve the wealth for their heirs, they consider transferring the house to their descendants. The idea is that if the property is no longer in their possession, they would be entitled to state supplementary benefits if necessary.
This assumption is misguided. This is because the authorities also take into account voluntarily assigned assets when calculating a claim, minus CHF 10,000 per year since the time of gifting. Therefore, the assignment has a negative effect on the level of supplementary benefits. Since the supplementary benefit reform in 2021, the following also applies: Following the death of someone receiving supplementary benefits, the heirs must pay back the supplementary benefits received in the last ten years. However, this only applies if the estate exceeds CHF 40,000.
But the cost of care should not carry too much weight in your considerations. Financial independence and freedom of choice are more important than transferring home ownership to your heirs as early as possible.
Granting residential right or usufruct
Usufruct and residential right allow you to transfer your house to descendants and to dispose of the property practically unchanged.
In the case of residential right, you can live in the house for life and pay only the usual maintenance costs such as electricity and operating costs. As a rule, you pay tax on the imputed rental value as income if you have the residential right.
In the case of usufruct, you can live in the house yourself or rent the property and take the rental income. As a beneficiary, you pay tax on the imputed rental value or rental income, and pay wealth tax. In addition, you pay mortgage interest and insurance premiums, exactly as you did as the owner.
The granting of an usufructuary right or residential right constitutes in principle a consideration of the transferee. It is very worthwhile clarifying the tax consequences of transferring your property in advance. If you continue to live in your family home, this can also have an impact on the inheritance obligation of compensation.
Transfer home ownership correctly and preserve value
Real estate transfers are no easy feat. This is why testators are recommended to seek competent advice. The inheritance experts at Credit Suisse provide you with professional support and help you to find the best solution for all involved.
