Well over one Trillion Euros (well over one Million, Million Euros) is now held in Assurance Vie (AV) policies and life insurance remains the preferred investment for French tax residents. Although the idea was born in the middle of the 17th century, the Assurance Vie today is a modern and tax efficient savings and investment product.
The idea of life insurance, in its form close to the current one, is attributed to Lorenzo Tonti, an Italian financier, and dates from 1652. A major turning point occurred in 1787 with the foundation of the “Compagnie Royale d’Assurance-vie”. By decision of the Council of State in 1818, life insurance was added to existing contracts. Immediately after the creation of the first “Pension Fund for Old Age” in 1850, the French State sought to find a way of guaranteeing a financial minimum for the oldest population combining retirement savings and life insurance. So, the Assurance Vie has had many different guises.
In the 21st century the quality and solidity of Assurance Vie policies have the effect of attracting more and more subscribers to become the preferred investment vehicle for tax residents of France.
What is an Assurance Vie ?
A single lump sum investment or regular premiums are paid to an Insurance Company, which then places the money with the investment managers of your choice. These are usually unit-linked types of investments, for example risk rated multi-asset funds. You can invest in any number of different funds or products and these are all collated together by the Insurance Company to form a collective bond, which is your AV policy.
If you have chosen your investments wisely (with the help of your financial adviser), over the long-term, the value of the units you hold in the funds are likely to increase the value of your AV policy. However, you must be fully aware and comfortable with the amount of risk that you are taking, since with any type of unit linked investment your fund value can go down as well as up, as a reflection of what is happening in investment markets. Over the long-term, however, the effect of short-term market volatility will usually be reduced.
Your financial adviser will help you with your investment risk profile and ensure that the assets held within your Assurance Vie policy match your personal investment risk profile.
Remember nowadays that bank deposits give you little or no interest (and with inflation may even be going backwards in value) and to achieve a return above inflation long-term, then a measured amount of risk has to be taken, but that risk has to be within your personal risk profile.
What tax advantages does the Assurance Vie give you?
Let us use an example to illustrate.
Mr & Mrs Smith retire to France. They have left, £200,000 in Equity ISA’s & Premium Bonds in the UK, making for them on average, 5% per annum.
When they become a tax resident of France, the tax-efficiency they enjoyed from their ‘home’ schemes is usually lost (for example these UK ISA’s & Premium Bonds). This is because as a French tax resident, they are liable to French taxes on all their worldwide income and gains, except for anything that might be exempted by the terms of a Double Taxation Treaty. Even if certain income is exempt from French taxes, it is usually the case that the exempt income must still be declared in France and will be included with their other incomes when calculating French income tax liability.
The fundamental point to note is that including such ‘exempt’ income has the effect of increasing the rate at which other sources of income are taxed in France, including investment income, so it is important for them that they structure their finances to suit the tax rules of the country they are resident in and consequently take advantage of any tax advantages that this may give them.
Their average 5% interest made in the UK (£10,000) is declared annually on their French Tax return and is taxed in France at a flat investment tax rate of 30% (12.8% income tax and 17.2% social tax) therefore £3,000 tax is due to be paid by them annually (30% of £10,000).
What if Mr & Mrs Smith put their £200,000 in an Assurance Vie instead, how would it be taxed?
Let us assume for a direct comparison, that it also makes the same 5% average growth per annum.
• Scenario 1, they leave the £10,000 growth made, in the policy, as the growth is in the name of the Insurance Company, it is not declared on Mr & Mrs Smith’s tax return (the policy number only is put on the tax return) and no tax is due, thus Mr & Mrs Smith save £3,000.
• Scenario 2, they withdraw the £10,000 growth as income and enjoy a well-deserved holiday. Under Assurance Vie tax rules only the growth element of their withdrawal is taxable, the growth in this example is 5%, therefore only £500 (5% of £10,000 withdrawal) is taxable, the rest is considered as return of capital. This is also taxed at 30% (for policies taken out after 27/09/17), thus £150 tax is due, instead of £3,000 if it was left in UK ISA’s/Premium Bonds, and Mr & Mrs Smith save £2,850.
Are there any more advantages for Mr & Mrs Smith?
Yes, if they both have policies or a joint policy, after holding the policy(s) for 8 years, each person can withdraw €4,600 per annum, completely free of income tax.
Conclusion, the Assurance Vie is extremely tax efficient for you in France and what are you waiting for Mr & Mrs Smith!
Are there any tax advantages for their beneficiaries when Mr & Mrs Smith die?
Without a doubt, the AV is effective for inheritance planning. There are age restrictions, (especially if you start a policy after the age of 70), but via an AV policy (started before age 70) you can leave up to €152,500 to any number of beneficiaries, each of whom will pay no French succession tax. AV policies are exempt from the strict French succession rules. You can leave your money to whomsoever you wish. Should you wish to leave more than this amount to any one beneficiary, they will pay tax at a rate of 20% on the next €700,000, and then at 31.25% above that.
Is an Assurance Vie right for me?
An Assurance Vie is a valuable asset, helping you to shelter your capital and income from unnecessary taxation. It can provide protection for you during your lifetime and protection for your loved ones when you are gone. However, everyone’s circumstances are different, and it is essential that you take professional financial advice before investing into this type of product. If you would like further details or to have a confidential discussion about your own personal situation, then please do not hesitate to contact us.
The information on these pages is based on current regulations and is intended as an introduction only and is not designed to offer solutions or advice. Beacon Global Wealth Management can accept no responsibility whatsoever for losses incurred by acting on the information on these pages.
Paul Flintham, IFA, Beacon Global Wealth Management.