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Tax
and estate planning figure prominently in the list of
priorities of many financially secure expatriate
residents of France. The Napoleonic code which forms the
base of succession law in France produces a fiscal
inheritance environment which is totally alien to most
of us. We cherish our right to leave our estate to
whomsoever we please, and are not happy to discover that
in France our choice is strictly regulated. Worse still,
our spouses do not rank highly in the portio legitima
in French law. Real estate and capital are the two
major concerns, and we should be relieved to learn that
there are mechanisms available to us in both areas to
help alleviate our worries. This article concentrates on
the preservation and development of capital, and
explains the huge benefits offered by the French life
assurance product, Assurance Vie.
There
are three major taxes that threaten the unprotected
capital of even the moderately well-off expatriate in
France. Income tax; wealth tax, and inheritance tax are
all queuing up for a slice of our capital, and if we do
not take steps to prevent it they can make serious
inroads into our net worth. Ever resourceful in terms of
personal finance, the French have over the decades
evolved and streamlined a product that is capable of
both protecting accumulated wealth and promoting its
development for the future enjoyment of the investor’s
heirs. Effectively an investment within a life assurance
wrapper, this product has been so successful that today
there are over €1.4 trillion invested in Assurance Vie
policies. Over 22 million individuals or couples have
either invested lump sums or save regularly using this
instrument.
To
understand the success of this product we need to look
no further than the tax concessions that it offers.
Neither French capital gains tax nor income tax applies
whilst the funds remain inside the policy and no
withdrawals are made. Even where an amount is withdrawn
only the growth element is then subject to income tax,
so for example if your portfolio of assets held within
the policy has grown by 50% only this percentage of the
withdrawal would be taxable; the remaining 50% would be
tax-free. Income tax on the gain is charged on a sliding
scale, depending on how long the policy has been in
force. Nominally the tax rate is 35% for a policy less
than 4 years old, 15% for policies between 4 & 8
years old and then 7.5% for all policies over 8 years
old. Whilst this may seem punitive for the first four
years, you can elect to have the gain added to your
taxable income and declared via your annual tax return,
making it subject to tax at your prevailing rate. This
is obviously advantageous if you have a relatively low
income. As an extra incentive to let your funds grow for
at least eight years, there is an annual tax-free
allowance of 4,600 euros (single person) or 9,200 euros
(married couple). This allowance relates strictly to
capital gain within the policy, so depending on the
growth enjoyed during the investment period, relatively
large withdrawals can be made completely free of income
tax. A quirk of the French tax system can work greatly
to the investor's advantage with an Assurance Vie
policy. The eight year qualifying period for the most
beneficial tax regime is governed by what is known as
the tax clock. This starts ticking at the instigation of
the policy, even if the initial investment is a
relatively small amount. It may not be wise to test this
system to its limits, but if say €100,000 were invested
on day one, and a further €200,000 a year later, the
entire fund would still be subject to the lowest tax
rates eight years later.
The
benefits of Assurance Vie policies are not restricted to
income tax or CGT. In France succession tax is directly
comparable to our inheritance tax, but it works in a
slightly different way. In the UK inheritance tax is
levied on the estate of the deceased, whereas in France
succession tax is levied on the beneficiary(ies) of the
estate. Any tax due is then deducted by the notaire from
the proceeds of the will. The proceeds paid out from
Assurance Vie policies largely override succession law
and succession tax. Any number of beneficiaries may
receive up to €152,500 completely free of tax, and pay
only 20% on any further amounts received. Whilst recent
changes to the tax regime regarding spouses and children
have undermined some of this advantage, there is still a
huge tax saving to be made when bequeathing legacies to
unrelated beneficiaries such as friends or
step-children, who would normally pay tax at 60%. There
are restrictions to this tax largesse however;
the policy must be set up and funded before the
policyholder reaches the age of 70. After this age the
tax advantage is restricted to a total of €30,500 for
all beneficiaries combined.
Generally
speaking, the value of an Assurance Vie policy is taken
into account in wealth tax calculations, but there are
circumstances where Assurance Vie can help mitigate
wealth tax liability. This is probably best explained by
using an example. If you have a large cash sum, say
€500,000 held on bank deposit accounts, this figure will
obviously be added to your wealth tax calculation along
with the value of property and possessions. The interest
earned will also be subject to annual income tax, and be
counted as income. If you place this sum within an
Assurance Vie investment and leave it there, you are not
generating any income from it and it is not being taxed.
If you have little other income you can then use another
French financial tool, the Bouclier Fiscal, to ensure
that your total tax bill, including residential taxes
and wealth tax, cannot exceed 50% of your income. If you
are asset rich and income poor, you can strategically
limit your tax bill in this way.
Your
capital grows by investing in the huge range of funds
Assurance Vie providers have available, which will
include as diverse a selection as they can ranging from
the standard equities through to commodities and other
fixed interest products. There will also be a range of
risk on offer to cater for all from the most cautious to
the highly adventurous. There are also a small number of
the major investment houses who now offer funds which
guarantee to preserve and protect an element of your
capital and accrued gain.
One final point
in favour of Assurance Vie - Some investment companies
are domiciled outside France, yet still have French
compliant Assurance Vie products to offer the UK expat.
Under the terms of the new Double Taxation Treaty
between the UK and France, contracts entered into on
this basis will not be subject to wealth tax for the
first five years of residency in France. Unfortunately
this treaty, although signed, has yet to be ratified by
the two governments. The existing treaty makes no
provision for this, so it will be an advantage for the
future. You do need to be aware however that only expats
who move to France after the ratification of the new
treaty will be able to benefit from
it
.
This
information is only provided as a guide and, if you need
assistance in this area you are strongly advised to seek
the help of a specialist in this field as each
individual case is different. If you have a question,
want to arrange for a free financial review or just want
further information I can be contacted on +33
(0)325461631, via my website
www.financialexpat.com or via
e-mail
steven.grover@spectrum-ifa.com
Spectrum
IFA Group company TSG Insurance Services Sarl is
registered and licensed in France.
TSG
Insurance Services S.A.R.L.
Siege Social: 34 Bd des
Italiens, 75009 Paris
« Societe de Courtage
d'assurances » R.C.S. Paris B 447 609 108 (2003B04384)
Numéro d'immatriculation 07 025 332
- www.orias.fr |
