The basic premise of financial planning is similar wherever you are in the world, in that you need to concentrate on three main areas:
- Savings and investment
- Retirement planning
- Estate planning
French Tax Legislation
The starting point for your financial planning in France should be French tax and investment legislation. It is only by applying solutions that have been tried and tested in accordance with French regulation that you can be sure that the desired result will be achieved. As a French resident, you should begin the assessment of your tax position on the basis that all of your worldwide assets and sources of income are eligible for taxation in France.
The French system offers many incentives for investors in that there are numerous ways to mitigate tax exposure. These include the joint taxation of couples, various family allowances, along with exemptions, abatements and deductions for different types of income. In addition, tax planning techniques are used to reduce levels of capital gains, wealth tax and inheritance tax in France.
Wealth protection with Assurance Vie
One of the most important aspects of living abroad is to understand which domestic products are appropriate in terms of financial planning. To this end, a number of banking and insurance products have been developed in order to help French residents structure their finances efficiently. For expats, the most effective of these is the Assurance Vie contract.
French life insurance products are structured as tax efficient savings vehicles for medium to long term investment. Regular and single premium investors living in France can benefit from capital gains and income tax concessions should they invest in an Assurance Vie policy.
This section examines three major taxes that impact expats in France and considers the use of Assurance Vie products to help protect assets:
- Income tax and the advantages of Assurance Vie products
- The use of Assurance Vie products for Wealth tax purposes
- Inheritance tax and succession planning
View our video on Assurance Vie for wealth protection below:
1. Income tax and the advantages of Assurance Vie Products
Assurance Vie products offer a number of incentives to savers:
- There is no limit on the amount that can be invested in an authorized Assurance Vie.
- Investors benefit from favourable tax treatment.
- Withdrawals in the form of capital or regular income can be made with only the growth element of the withdrawal being liable to tax.
- There is a wide range of funds to choose from including the traditional asset classes of equity and bond funds, along with guaranteed protected capital funds.
Taxation on maturity / withdrawals / surrenders
The tax treatment of French life insurance products is as follows:
There is an annual tax free allowance for withdrawals from policies after an 8-year investment term. This currently amounts to €4,600 for a single person and €9,200 for a couple.
Tax payable on withdrawals may be deducted at source by the insurer before any pay-out, or alternatively declared as a gain in your annual income tax return.
If you opt for deduction at source, the following tax rates are levied on any gains:
- Gains realized in 1 – 4 years 50.5% (35% income tax and 15.5% social tax).
- Gains realized in 5 – 8 years 30.5% (15% income tax and 15.5% social tax).
- Gains realized after 8 years – withdrawals are tax free if the ‘gain’ is no more than € 9200 per annum. Any additional ‘gain’ is taxed at a maximum rate of 7.5% (plus 15.5% social tax).
If you opt to declare your gains from your policy on your annual income tax return in France, you pay tax on them at your highest applicable rate. The social taxes are also levied.
2. The use of Assurance Vie products for wealth tax purposes
Resident of France are subject to wealth tax on their worldwide net assets. These assets include items such as cash, property owned by the household, as well as financial investments, cars, boats, jewellery, furniture and other valuables. Non-residents are also liable for wealth tax, but only on the net value of assets physically situated in France, such as second homes.
There are a number of ways to reduce the level of wealth tax in France. Various items such as unpaid taxes, outstanding bank loans and other debts can be deducted from the calculation. In addition, there is an allowance on the value of a main residence.
Assurance Vie contracts can also be used as a way of reducing potential wealth tax liability. As of 2013, a wealth tax ceiling limits total French and foreign taxes to 75% of income. This encourages wealthy individuals to live off the proceeds of capital, leaving income and gains to build up inside private investment funds or Assurance Vie contracts as a way of reducing potential wealth tax liability.
3. Inheritance tax and succession planning
Assurance Vie contracts can be used as an estate planning tool in order to protect assets when living in France.
The use of Assurance Vie for French inheritance tax planning
Being aware of your rights with regards lifetime gifting, and understanding the legal options available in terms of the ownership of assets, enables you to reduce the burden of inheritance tax in France. Assurance Vie contracts offer individuals certain inheritance tax planning incentives.
French succession laws
French inheritance tax and succession planning go hand in hand. Succession laws apply to the world wide assets held by anyone domiciled in France. The tax liability falls on the beneficiary and is applied to all the bequests and inherited rights of the estate of the deceased. Succession law specifically protects children from being disenfranchised from their inheritance. Since the surviving spouse is not regarded as a “protected heir”, estate planning can become an extremely challenging exercise for many expatriate residents. Fortunately, a solution is at hand for the preservation and development of capital through the use of French life assurance vehicles.
The Assurance Vie offers a shelter from the rules of “forced heirship”, making it a useful tool for spouses to transfer assets between one another and provide protection to the surviving partner in the event of death. The proceeds paid out from Assurance Vie policies are largely beyond the reaches of French succession law. In the event of death, the proceeds of an Assurance Vie are distributed to the beneficiaries (net of social taxes). It is however potentially subject to French inheritance taxes. The following rules apply:
- Policies left to the spouse or PACS partner are exempt from inheritance tax.
- All other beneficiaries have an Assurance Vie tax-free allowance of 152,500€ per person, on the provision that investments were not made after the policy holder’s 70th birthday.
- Any additional Assurance Vie distributions above these allowances are taxed at 20%, with an upper rate of 25% applying to any excess above 902,838 €.
** Note: As of July 2011, beneficiaries of Assurance Vie contracts are no-longer exempt from the 20% tax if the policyholder was non-resident in France at the date of subscription. There are also significant tax benefits to be had when bequeathing legacies to unrelated beneficiaries such as friends or step-children provided that such distributions have been made prior to the 70th birthday of the bequeather. After this age the tax advantage is restricted to a total of €30,500 for all beneficiaries combined.
Whatever your marital situation, it is important to give thought to succession planning, in order to secure greater control over your estate, plan an orderly inheritance, and reduce the potential inheritance tax liability of inheritors.
If you would like further information on the use of Assurance Vie products in France, please download our free guide.