(maybe we should close the french post and not fork the discussion )
0.5% average interest rates doesn’t seem realistic, the past decade was abnormal. 2-3% range is probably the target range for any central bank.
First you obviously would need to have returns higher than what you borrowed. And leveraged investing carry much higher risk.
Then, because capital gains are untaxed, if you get most returns as capital gain you minimize your tax liabilities.
But I’d question the focus on “lowering taxes”, you should focus on maximizing the post tax income (because obviously you pay more taxes when you earn more money). Doing “weird” things to lower the taxes might not increase the overall return (e.g. if you invest in sub optimal things instead).
Do you have an investment strategy? Do you know your risk threshold (how well you’d sleep if you’re wealth goes down by 40%+ for a few years+)?
That’s probably the initial questions to ask. Taxes are secondary.
It’s not so easy to reduce income tax through debt:
If your companies are successful, they will pay dividends. It is very unlikely that debt interest > dividends → your marginal tax rate will rise
The elimination of the deemed rental income is currently being discussed in Bern. One of its side effects would be to limit the interest deduction to 40% of the taxpayer’s assets net taxable income.
Investing with leverage is an indicia of the professional trader
Without further details on your personal situation, it’s impossible to assess your idea of investing using debts.
A tax professionnal will be able to give you more insights.
With taxes in this region you should consult a wealth/tax planning specialist as soon as possible (If not done already).
Not only in Switzerland but all over the world. The trick is to negate your income and wealth as much as possible.
You invest all your money into working assets (stocks, real estate etc.).
If you own a company only pay yourself dividends if there is no other way as dividends are not tax efficient. It’s better to let your company grow in value in any way so you can borrow more money.
All future spending is done over an asset-line/margin loan against your assets.
You borrow money for your personal spending and invest into working assets to maximize wealth progression
The interest of the borrowed money can be deducted from your income and the debt can be deducted from your wealth.
Profit! (Explained as easy as possible without going into details. There are more tricks like using a foundation as owner of your wealth and you only get paid what you need for your living but that’s what a wealth/tax planning specialists would evaluate.)
The easiest way of reducing income tax is by reducing your income. Just work less.
If you want to take out debt for the sake of having interest payments to deduct; thats an indirect way of doing thr same - you work the same but you earn less. Whats the point?
Remember that you can deduct interest you pay - which is cash-out for yourself, so its less money you earn.
Debt only makes sense if you want to leverage your investments; but then the Motivation is not to reduce your tax.
(maybe we should close the french post and not fork the discussion )
0.5% average interest rates doesn’t seem realistic, the past decade was abnormal. 2-3% range is probably the target range for any central bank.
First you obviously would need to have returns higher than what you borrowed. And leveraged investing carry much higher risk.
Then, because capital gains are untaxed, if you get most returns as capital gain you minimize your tax liabilities.
But I’d question the focus on “lowering taxes”, you should focus on maximizing the post tax income (because obviously you pay more taxes when you earn more money). Doing “weird” things to lower the taxes might not increase the overall return (e.g. if you invest in sub optimal things instead).
Do you have an investment strategy? Do you know your risk threshold (how well you’d sleep if you’re wealth goes down by 40%+ for a few years+)?
That’s probably the initial questions to ask. Taxes are secondary.
Thank you, all great points.
Yes the interest rate was incorrect. It does not matter though, I would consider the historical average over very long stretches of time and to your point investments would then need to be over that interest average.
To your last question, my current investing strategy is 0 debt, 100% invested in low-cost total world index (taxable + pillar 3a). No bonds yet, I consider my pillar 2 as a form of diversification (I might add bonds in a decade or two though). No real estate yet which is a gap in my investment strategy, but real estate is overall not a good investment at least for me (low risk adjusted returns vs other asset classes, bad portfolio diversification due to high cost of property ownership in CH) that being said I’m definitely not dismissing the asset class and there might be good ways to go about it.
I’m still concerned about taxes as my only source of income is salary which doesn’t seem like a very smart situation. Have some assets (e.g. businesses) with leverage and generating income could potentially reduce taxes, diversify income sources. Again that’s theoretical and based on your answer I might be wrong.
The easiest way of reducing income tax is by reducing your income. Just work less.
If you want to take out debt for the sake of having interest payments to deduct; thats an indirect way of doing thr same - you work the same but you earn less. Whats the point?
Remember that you can deduct interest you pay - which is cash-out for yourself, so its less money you earn.
Debt only makes sense if you want to leverage your investments; but then the Motivation is not to reduce your tax.
Can’t you also deduct the debt principal at least for wealth taxes?
Great point on the leverage.
With taxes in this region you should consult a wealth/tax planning specialist as soon as possible (If not done already).
Not only in Switzerland but all over the world. The trick is to negate your income and wealth as much as possible.
You invest all your money into working assets (stocks, real estate etc.).
If you own a company only pay yourself dividends if there is no other way as dividends are not tax efficient. It’s better to let your company grow in value in any way so you can borrow more money.
All future spending is done over an asset-line/margin loan against your assets.
You borrow money for your personal spending and invest into working assets to maximize wealth progression
The interest of the borrowed money can be deducted from your income and the debt can be deducted from your wealth.
Profit! (Explained as easy as possible without going into details. There are more tricks like using a foundation as owner of your wealth and you only get paid what you need for your living but that’s what a wealth/tax planning specialists would evaluate.)
Thank you, extremely helpful
I haven’t ever consulted a tax planning specialist and will do so now. I will look for a Vaud / Suisse Romande specialist (any recommendations welcome!)
Then on your following points and 6-step process, this is pretty much what I had in mind. I guess the specialist will help me understand starting at which point this strategy becomes financially interesting.
I understand that borrowing against stocks would be possible? Do the stocks need to be in a CH broker? (Currently using IBKR)
More generally, is there a way for me to learn more about this type of approach? I tried to search for books but nothing came up, most financial litterature is centered around basics (spend less, invest more, don’t be in debt, diversify, invest in low cost index funds etc etc)
Your point number 2 here raises some concerns: as far as I know the tax authorities will complain if you only pay yourself dividends and no salary. I don’t think this is possible in Switzerland but please do correct me if I am wrong. Also if you earn let’s say 50k/year and then pay yourself 50k/year dividends this will raise some red flag with the tax authorities. It needs to be a “sane” ratio or “balance” between your income and dividend you pay yourself out. The same applies for borrowing money from your own company.
Anyone with more experience running their own company might give better feedback regarding this crucial point.
Lombard loans are a way to do it. To note that, while the thought process leading to the borrowing may vary, ‘buy, borrow, die’ is still a way to leverage your assets (your total assets exceed your net worth). I would assess whether I have the temperament for it by pondering whether I would be willing to borrow money and buy stocks on margin.
A corrolary to that is that, if you do it, you may want to borrow against a basket of assets less volatile than 100% stocks (or not, it depends on your personal risk assessment).
We are in a similar situation with my wife and in order to reduce taxable income we do the following :
Max payment to 3rd pillar
Rebuy in 2nd pillar (unlimited for 95% of the population, but limited for me as my pension fund has a particular model)
We bought a house built in 1980 and we renovate it every year a little bit in order to reduce taxes as renovation costs are still (until when with the project of suppressing the “valeur locative”?) deductible from income. Every year end of summer I perform a tax simulation and we order some renovation in order to keep taxes to an acceptable level. As a result, we get tax reduction and financial help “subvention” from the Government for energetical renovation.
The house is rented by the former owner, he is retiree. One day, we will move there.
I would not just work less, but combine these 3 options to reduce income taxes.
I don’t think those things apply much to your situation, it would only optimize the non-salaried part of your income (and I doubt you’re having 100k in taxes from VT dividends alone ).
(but as other mentioned even that setup might not be easy since the system tries to prevent that kind of gaming)
For this kind of setup to have some impact, it’s only for extremely high wealth (generating a lot of income), or if you’re not salaried (e.g. self employed). So your first step would be to quit your job and work e.g. as a consultant instead through your own company.
Borrowing to lower taxes is also popular for very wealthy people to avoid realizing capital gain (or losing control of a company), but since capital gain aren’t taxed in Switzerland it’s not so relevant.
I think that’s not correct, as you said you’re 100% invested in VT so you already have another source of income. As your wealth grows that will become bigger (how much do you save per year, I assume well above how much you pay in taxes? so that should grow pretty quickly).
And overall Switzerland (even in Romandie) has fairly low taxes overall so you’re not leaving that much aside for taxes compared to most other places.
Going back to taxes, if most of your income comes from a salaried job, the most relevant things will be pillar2/3a, and moving to a place with lower taxes.
(if the pension fund is half decent, which for a high paying job I assume it would be, I’d probably top it up to keep at least some “safe” investment, esp. when you are at the top marginal tax rate when the tax benefit is the highest, it’s hard to beat).
Finally you have a very aggressive allocation, you might already be implicitly leveraging if you don’t put money aside for taxes. If you’re really comfortable with your current allocation you can add leverage (maybe write down the scenario though, e.g. if VT drops by 40%, how much do you drop when leveraged, etc.), but it won’t significantly lower your taxes compared to your salary, at least until your have very high wealth.
move to Zug or another low tax canton, if not already the case (given family situation allows this). Easiest way to reduce income tax, other than to earning less income.
Interest is deductible from your taxable income and for most people capital gains on shares are not taxable.
You could take a margin loan from Interactive Brokers at 2.8%. Marginal tax rate is >40% so interest after tax is <1.7% This is lower than SNB’s target inflation rate. In real terms debt is ~constant / shrinking slightly
Invest the 100k CHF in stocks and expect to earn 7% nominal / 5% real over the long term. Favour low dividend stocks
As others have said make sure you have the right balance in your portfolio for your personal situation.
Property is another option to take advantage of tax rules but currently rental yields are still too low in my opinion (prices too high relative to rents)
Edit: This is not financial advice do your own research
I believe a benefit providing an incentive to borrow for the wealthy in some Swiss cantons is “Bouclier Fiscal” : Cantonal and communal tax cannot exceed 60% of taxable income.
We are in a similar situation with my wife and in order to reduce taxable income we do the following :
Max payment to 3rd pillar
Rebuy in 2nd pillar (unlimited for 95% of the population, but limited for me as my pension fund has a particular model)
We bought a house built in 1980 and we renovate it every year a little bit in order to reduce taxes as renovation costs are still (until when with the project of suppressing the “valeur locative”?) deductible from income. Every year end of summer I perform a tax simulation and we order some renovation in order to keep taxes to an acceptable level. As a result, we get tax reduction and financial help “subvention” from the Government for energetical renovation.
The house is rented by the former owner, he is retiree. One day, we will move there.
I would not just work less, but combine these 3 options to reduce income taxes.
Blockquote
Thank you.
I do #1 and from my calculations #2 is not worth it (better returns by investing the equivalents in a total world ETF, even if accounting for tax advantages of pillar 2) #3 is very interesting - I would love to learn more. I do assume that you get taxed on the rent income?
(if the pension fund is half decent, which for a high paying job I assume it would be, I’d probably top it up to keep at least some “safe” investment, esp. when you are at the top marginal tax rate when the tax benefit is the highest, it’s hard to beat).
From my calculations, pillar 2 buyback did not make as much sense earlier in in life my wife and I both in our thirties and a good closer to retirement when income is at its highest. Is that usually the case ?
I will consider a margin loan as another option from the ones discussed here, to increase my exposure to stocks, but based on my risk profile I would like to limit the maximum decline to 80% of my overall net worth thus maybe 10-20 % of leverage only. I would leverage myself, the leveraged ETFs are quite bad and inefficient (discussed many times on this forum I think)
move to Zug or another low tax canton, if not already the case (given family situation allows this). Easiest way to reduce income tax, other than to earning less income.
Unfortunately not possible currently I might try to relocate to Fribourg or another canton, maybe. I really like Vaud Relocating definitely sounds like the easiest way to reduce taxes but my worry with Zug is that some other prices must be priced accordingly (rent etc) considering many of the residents would be high earners.
FYI, you mentioned you were 100% in VT, that wouldn’t match the stated risk profile even before leveraging. If you really target only having -20% tolerance, then fixed income (or pillar2) should be a decent chunk (20%+?) of your allocation.
Edit: Or you mean you’d be ok with -80%? That’s quite a risk tolerance I don’t know many people that would sleep well after seeing most of their wealth evaporating
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Relocating definitely sounds like the easiest way to reduce taxes but my worry with Zug is that some other prices must be priced accordingly (rent etc) considering many of the residents would be high earners.