Finally, Switzerland looks set to do away with its imputed rental value system! But abolishing it will involve far more than just getting rid of a tax – a completely new system is set to emerge. National Councillor and expert Franziska Ryser shares more on just what this could mean for you as a homeowner and the pros and cons of this abolition.
It came into being thanks to an emergency law and has been repeatedly and intensely debated ever since: imputed rental value is a tax alien to almost any other country except Switzerland. And now, after years of see-sawing, change appears to be on the horizon, with the National Council discussing renewed attempts to abolish the imputed rental value in the autumn of 2022. However, any promulgation of this law remains some way off. In the absence of majority support for the first bill, the relevant committee of the National Council will have to re-examine the legislation and several questions remain to be resolved.
As Franziska Ryser freely admits “It’s a tangled web.” And one in which the National Councillor from St. Gallen and Vice President of the Swiss Green Party finds herself caught in, as President of the Sub-commission deciding whether or not to abolish imputed rental value. We spoke to her to get the lowdown on what exactly parliament is discussing, what effects can be expected and who would benefit from an abolition.
The term ‘imputed rental value’ describes the income that property owners would earn if they rented out or leased their property. The word “would” is key here - this term from Swiss tax law refers to a hypothetical income only. But even though property owners see none of the assumed income, it still has to be taxed, which is what makes Imputed Rental Value so controversial as a tax. As Franziska Ryser explains: “The Imputed Rental Value is technically understandable, but perceived by many homeowners as an unfair tax. And that is probably enough reason to reconsider the current system of housing taxation and reflect on whether we can find any better solution.”
It falls to each canton to pinpoint the exact amount for imputed rental value and if you think that sounds complicated, you’re not wrong! Convoluted it definitely is, but as a quick-and-dirty answer, owners should assume that the imputed rental value will constitute at least 60% of annual rent. In return, mortgage interest and maintenance costs can be deducted from the taxes on the imputed rental value.
Homeowners have been paying the imputed rental value tax for almost 90 years and despite looking to be on its last legs for decades, several attempts in parliament and two public votes have all failed to kill it off. Now, however, its end appears closer than ever. First, the Council of States issued an “affirmative” verdict to abolition in September 2021, followed a year later by the National Council.
However, the first bill presented before the National Council was rejected out of hand. What it proposed was abolishing the imputed rental value on all condominiums, but still allowing owners to deduct mortgage interest and maintenance costs from their taxes. The problem? A giveaway this generous would tear a huge hole in the tax coffers. Assuming a mortgage interest rate of 1.5 percent, the nationwide tax loss would be close to an estimated 3.8 billion Swiss francs. Enough, in other words, for the Swiss government to provide 7,600 police officers with a new Ferrari to zip around in.
The ball is now in the court of the Economic Committee of the National Council (WAK-N), which is handling the matter and revising the unsuccessful bill. One option seemingly gaining sway would be to abolish the imputed rental value, but not allow deductions for mortgage interest and maintenance costs to be claimed for tax purposes. In other words, homeowners won’t be able to have their cake and eat it.
All of which means abolition is not the only point of discussion - the scope is also encompassing general tax conditions, with everything pointing to roots-and-branch change in the system. As National Councillor Franziska Ryser explains: “It’s like a finely tuned set of interlocking gears. Even if you adjust one part only slightly, the repercussions in many other places are unavoidable. And that is precisely what makes it such a thorny issue.”
In the words of former German politician Hans Eichel: “Citizens are happy when they have to pay less tax.” And this applies to imputed rental value in particular. Given the purely hypothetical nature of the income, few owners see the sense behind the tax. In fact, it can become a real problem for owners when their incomes decline. “Particularly when you reach retirement age and your effective income is lower, the tax can become a millstone,” explains Franziska Ryser.
As things stand, the system we have now ends up rewarding those who get into debt. Homeowners saddled with high mortgage interest can deduct more from their taxes, which can even leave them with little incentive to repay the loan in some cases. As Ryser affirms: “This has spawned a relatively high debt ratio in Switzerland. Abolishing the imputed rental value would incentivise people to reduce this debt. Lower debt would make families less dependent on rising mortgage rates and thus help them remain financially independent. It would also help stabilise our Swiss financial system as a whole.”
Halve any employee’s salary and they’d be in trouble - and the same applies to the state’s finances. The income from imputed rental value tax contributes a significant portion of the cantonal budget. Collectively, the WAK-N commission is currently striving to solve this issue. As Franziska Ryser reaffirmed, the end goal is to develop a system capable of partially compensating for this loss.
Interest rates could impact the new tax system. If they soar, some homeowners may end up paying more in taxes than under the current Imputed Rental Value. This could lead to unequal effects, with some benefiting and others not. In other words, individual circumstances would determine the respective winners and losers.
Some homeowners in particular would be nailed-on winners if the imputed rental value tax were to bite the dust. As things stand, those who have almost paid off their mortgage and spend little or nothing on maintenance are still hamstrung by high taxes, given hardly any scope to deduct from the imputed rental value. And as Franziska Ryser confirms, any recent revaluation in the house only exacerbates the problem. “If property values climb, the imputed rental value of a property tends to follow suit. Ergo: the tax you pay soars.” Many pensioners also find the imputed rental value of their own home becoming an increasing burden. Living on a pension means a low income and the mortgage is often already paid off. Once again, this leaves little room for deduction. It’s groups like these who would benefit most from any abolition.
But abolishing imputed rental value would not mean a payback for all: owners who currently pay high mortgage interest and invest in renovating and maintaining their homes would pay more taxes going forward. Previously, although such costs were deductible, this would no longer be the case after the abolition.
But what will be the impact on maintenance work? To date, tax deductions have been the main thing incentivising owners to invest in energy-efficiency upgrades and other work on their homes to sustain and enhance their value. Abolishing the tax deduction would also put paid to this incentive. This reminds us what a far-reaching issue this really is and the significant repercussions any final decision is likely to have...
For now, any final verdict will have to wait. As is so often the case, the devil is in the detail and the precise details of the draft legislation still need to be hammered out. What does seem clear is that finding a solution that suits all parties is unlikely. Ryser agrees: “Unfortunately, there is no such thing as a ‘perfect solution’. We will soon know more and then each of us will be in a position to assess their own situation.”
The final machinations deciding whether or not the imputed rental value tax will be abolished will unfold in the spring and summer of 2023 and the prospects for another referendum remain unclear. For the latest, the Federal Council press releases are your best port of call.