Ask most people, and wherever they happen to live, at a given time, they will probably say that they value tax efficiency and effective estate planning – and rightly so. If you have recently moved from one part of the world to another – for example, from the UK to France – there will be a lot for you to learn concerning your new jurisdiction.
In the case of those making the move between the UK and France, one thing that can be especially puzzling and bedevilling, is French succession law. France has a Napoleonic code setting out succession law to those who are resident in the country, which can go against people’s actual wishes.
This might seem odd to most Anglo-Saxons, however, tell almost any French national that, in the UK, disinheriting your children is fine, even normal and they will give you a puzzled look, exclaiming that cannot be right! Different country means a different culture and perspective.
The good news is that – although, for French residents, the perfect inheritance solution for your estate can never be guaranteed – the country does offer some interesting financial options, including for private investments.
These solutions could help to lower future tax bills and give you greater control over how your estates are distributed when you die, with one of those possibilities being the ‘assurance vie’.
What is assurance vie?
The term “assurance vie” literally translates as “life insurance”, although it differs a lot from the kind of life insurance product you can expect to come across in the UK.
A better way to think of an assurance vie, is as essentially a life insurance “wrapper” that holds investments. You can take advantage of it if you are a French tax resident – including if you are a foreign national – and, this product being extremely versatile, offers benefits regarding both tax structuring and inheritance.
An assurance vie can be as simple or as complicated as you wish it to be.
You might choose to think of it as akin to an old shoebox for keeping documents in; you can place investments inside your assurance vie, and they will not ever be touched by French income tax or capital gains tax, for as long as they are kept inside the assurance vie. While they are in the assurance vie, most of your investments will not be subject to any social charges, except where there is a guarantee provided on capital and returns.
But at the same time, the assurance vie is not locked. You can take money out of it at a time of your choosing, unlike with a pension, for which access is subject to age restrictions.
And when it comes to leaving your financial assets to your chosen heirs – as opposed to those Napoleon would have wanted you to leave them to – an assurance vie can be great for leaving each individual beneficiary a significant sum, on which there will be no need to pay French inheritance tax.
How does an assurance vie work?
The way an assurance vie works is as follows: you pay a single lump sum investment or regular premiums to an insurance company, which then places the money with an investment manager – or several investment managers – that you have chosen.
These tend to be unit-linked types of investments, such as in equity or bond funds, although there are also deposits or special products available from a variety of financial institutions. It is up to you exactly what mix of funds or products you invest in, and an assurance vie policy enables you to have all of them collated by the insurance company into a single collective bond.
Hopefully, you will have made sensible investment decisions with help from a financial adviser, so that over time, the value of the units you hold in the funds goes up – thereby also boosting the value of your assurance vie policy.
But of course, as always with unit-linked investments, fund value can go down, as well as up. You will therefore need to be vigilant about this, even if it is still true that in the long term, any short-term volatility in the investment markets should have less of an impact on your assurance vie investment.
How is assurance vie assessed to tax?
Only the gain element of any amount you withdraw from your assurance vie policy will be subject to income tax.
Indeed, much of any withdrawal is deemed to be return of capital, thus not assessable to tax at all. This is the single most crucial point to understand because this is where the tax savings are made, not the rate at which they are assessed.
So, what are the tax benefits of assurance vie?
Owning an assurance vie policy for more than eight years means that your first €4,600 – or €9,200, if you are a married couple – of growth withdrawn each year can be free of income tax. Given that much of any withdrawal is considered return of capital (so not assessable to tax), it can be harder to use up these allowances than you might think.
Another major attraction of an assurance vie from a tax perspective, is the opportunity it could give you to reduce your succession tax liability.
Provided that you set up your assurance vie policy prior to your 70th birthday, you can name as many beneficiaries as you want on your plan, and when you pass away, they will receive up to €152,500 tax-free. After this, they will pay a flat tax rate of 20% – when the taxable part of the assurance vie is below €700,000 – and 31.25% on any excess over €700,000.
Even if you are over 70 years of age, setting up an assurance vie policy still presents some advantages. Your heirs will not receive the above allowances – being subject to the usual succession tax rates – but the first €30,500 will still be tax-free, as will all capital gains.
Are there any other benefits of assurance vie?
An assurance vie policy can undoubtedly be immensely useful for the inheritance planning of many British expats in France. The ability to leave as much as €152,500 to any number of beneficiaries, with none of them needing to pay any succession tax, can be a great boon.
But there are also other notable advantages that an assurance vie presents, including the scope it can give you – depending on the specific policy you choose – to hold a broad range of several types of investments under one roof. This, in turn, can make them easier to manage, your tax and investment planning having been combined in a single exercise.
There are normally very few or no costs incurred by purchase or sales transactions within an assurance vie policy. This enables those with an assurance vie to change their investments in line with their circumstances and wishes at any given time, without having to worry about off-putting added costs.
By setting up an assurance vie investment, you could also be helping to make your nominated heirs’ lives easier when you do pass away, as investments within an assurance vie are often easier to distribute on the policyholder’s death.
In theory, an assurance vie falls outside of the policyholder’s estate. This enables it to be left directly to beneficiaries, instead of it being tied up in French legal process after the passing of the policyholder.
So, is an assurance vie right for me?
One of the most important things to note about assurance vie policies, is that they are by no means all the same. Different assurance vie policies present different advantages, so before you seek out such an investment structure, you will need to be clear about exactly what you are looking for in one.
It should be borne in mind that all French based assurance vie agreements and contracts will be written in French. So, you will need to take care to ensure you understand you are signing up for a policy that will cater to your requirements.
We favour contracts written under French law, with a French provider (to ensure strict compliance with French law) outside of France, which gives access to paperwork in English and a choice of different currencies, such as Sterling and US Dollars. This also adds flexibility to work across international borders, with the ability to offer, for example, HMRC compliant tax reporting to those returning to the UK.
French tax rules and rates also tend to change often, so you should never assume that all the information in an article like this one will be correct by the time you read it.
These factors give you even more reason to enquire to trusted and experienced financial consultants, such as those here at Kentingtons, who are accustomed to helping people moving to France, and who are well-informed on the latest regulations in the country.
Every British expat will inevitably have their own circumstances, goals, and estate plans to consider. So, for the most suitably tailored help and advice, please do not hesitate to contact Kentingtons via phone or email today.