Assurance Vie – The Expat Guide
Various countries, including France, offer tax-efficient savings and investment plans, an Assurance Vie being one of them. These plans encourage people to save money for the long-term and avoid becoming a financial burden to the government. However, once you become a French resident, you no longer have the same tax-efficiency benefits as in your home schemes. This is because you are subject to French taxes on all of your income and gains, with the exception of any that may be excluded under the terms of a Double Taxation Treaty.
Even if some of your income is exempt from French taxes, you will typically still need to disclose it in France, and it will be added to the rest of your income when determining your French income tax due. The important thing to remember is that taxing such exempt income has the effect of raising the rate at which other types of income, like investment income, are taxed in France.
Tax-free Account in France
For short-term savings, there are various tax-free accounts available in France, including:
- Livret A: Available for both citizens and non-residents, where you can invest up to €22,950 and receive an annual interest of 0.5%.
- Livret Développement Durable: Available solely to taxpayers who are residents of France, for deposits up to €12,000 and gaining a 0.5% interest rate.
- Livret Epargne Populaire: Available for only French taxpayers who are residents of France, which offers an additional 0.5% interest rate on deposits up to €7,700 if your income is below a specific limit.
There is one product that stands head and shoulders above the rest for medium- to long-term investments (as opposed to savings), and that is an Assurance Vie.
What is an Assurance Vie?
An Assurance Vie (AV) is a life insurance investment product. The product may be outdated and damaged, yet it offers a few unique qualities:
- The investments you deposit in your AV are exempt from French income tax and capital gains tax for as long as they remain there.
- Investments within the AV are never subject to social fees. Be aware that Fonds en Euros, from which social costs are taken yearly, are exempt from this.
- Contrary to a pension, which has age restrictions, with an AV your money is yours to withdraw whenever you please.
- You can leave each individual beneficiary a sizeable sum absolutely free of French inheritance tax if your goal is to transfer your financial assets to your preferred heirs.
Millions of French individuals use the AV as their primary method of saving and investing. Thus through French banks and insurance firms, many billions of Euros are saved and invested. Additionally, a considerably smaller number of businesses who are not French have created AV products that are compliant with French standards and are expressly targeted at the French expat market. These businesses are often located in financial hubs of the EU with strict regulations, such as Dublin and Luxembourg. To ensure you receive the same tax and inheritance benefits as a French equivalent product, it is crucial to confirm that the company has a French fiscal agent before choosing them.
Key benefits of an Assurance Vie
Comparing international AV policies to French policies, some benefits include:
- You can invest in currencies besides the Euro, such as the Sterling and the Dollar.
- A wider variety of investment options are accessible, giving access to top investment management firms and capital-guaranteed funds and products.
- English-language documentation makes it easier for you to comprehend the AV policy’s terms and conditions.
- The AV policy is typically transportable, which is advantageous if relocating inside the EU as it frequently allows for tax efficiency in other EU nations.
Process of an Assurance Vie
An insurance firm receives your one-time lump sum investment or recurring premium payments. The funds are then distributed to the investment manager(s) of your choice. These are typically unit-linked investment types like stock or bond funds, but they can also be deposits or unique products that are offered by different financial institutions. You can invest in as many various types of funds or products as you choose, and the insurance provider will combine all of them to create your AV policy, which is a type of collective bond.
The value of the units you hold in the funds, as well as the value of your AV policy, are likely to rise in the long run if you have made good investment decisions (with the assistance of your financial adviser). However, you must be completely aware of and at ease with the level of risk you are taking because, with any sort of unit-linked investment, the value of your fund might fluctuate up and down depending on the state of the financial markets. However, the impact of short-term market volatility will often diminish with time.
Can I use an Assurance Vie to have my capital guaranteed?
The option to invest in Fonds en Euros is a typical element of the French AV. Since your capital, as well as any interest and year-end bonus paid to it, are guaranteed, this particular sort of fund is intended to serve as a highly careful foundation for your overall investment. In order to increase returns, the fund primarily invests in corporate and government bonds, while there may also be a small amount of exposure to equities and real estate. Your capital will accrue interest during the year, and by law, the insurance company is required to credit the majority of your portion of the fund’s return to your account in the form of a year-end bonus. To smooth out future investment returns, for instance in periods of subpar market investment performance, the remaining balance of the return of the fund is maintained in the insurance company’s reserves.
The rate of return with Fonds en Euros is normally low due to the nature of the guarantees. Nevertheless, is typically better than the interest you might earn from a bank account with quick access. However, the tax authorities believe that this form of fund is so secure that social costs are imposed annually on the gain (rather than only at the time that you take a withdrawal as would be the case with other investments within the AV). Over time, this essentially lowers the rate of return. It is possible to invest in structured bank deposit offerings through some international AV plans, providing the security of a capital guarantee while the investment return is correlated to the stock market.
How do I decide what investments to make inside my Assurance Vie?
Having a reliable financial consultant on hand is beneficial whether you have strong opinions about this or none at all. His or her responsibility is to assist you in developing your understanding of investing as a whole and your attitude toward risk. Sadly, without assuming some level of risk, you have no realistic possibility of earning a significant return on your savings. In recent years, we have also seen that even putting your savings in a bank can be problematic, whether because you don’t receive a meaningful rate of return or because the bank falls as a result of poor management.
Your advisor will walk you through various investing possibilities, explaining how they operate, their past performance, and the level of risk involved. Although you ultimately decide, his or her assistance can be quite helpful. There should be follow-up meetings to examine the performance of your assets after the investments have been made. Depending on the growth of your personal situation, the performance of the funds, or even because they have fascinating new funds to offer to you, your adviser may very likely suggest some modifications.
You can also use the services of a discretionary fund manager, who will manage your money at their discretion to help you reach your financial objectives once you and the manager agree on an investment mandate based on your unique investment objectives and risk profile.
How are taxes applied to an Assurance Vie?
Any cash you withdraw is only subject to income tax on the gain component, and the amount of tax due depends on when the premiums were paid.
Premiums paid before September 27, 2017:
For premiums paid before September 27, 2017, the taxpayer has the choice to be taxed at the progressive rates of the barème scale or the Prélèvement Forfaitaire Libératoire (PFL) rates, as follows: for the first four years at a rate of 35%, between the fourth and eighth years at a rate of 15%, and after the eighth year at a rate of 7.5%.
Additionally, social charges at the rate of 17.2% are due.
Payments of premiums as of September 27, 2017:
The Project de Loi de Finances 2018, which was released on September 27, 2017, introduced the Prélèvement Forfaitaire Unique (PFU), often known as the Flat Tax. The taxpayer’s total interest, dividend, and capital gain earnings from the sale of shares are now subject to the PFU. Additionally, certain gains on withdrawals from assurance-vie contracts are covered by this.
The fixed income tax rate is 12.8%, and there are also 17.2% in social charges, for a total tax rate of 30%.
When paying premiums for assurance-related contracts starting on September 27, 2017, the tax rate will change based on the contract’s age. For contracts older than eight years, it will change based on how much capital was still in the contract as of the 31st of the year before the withdrawal was made.
The threshold amount, which is established by reference to the amount of premiums invested, less any money previously withdrawn, and not the contract’s value, is €150,000 per individual person (across all assurance vie policies).
Couples who are taxed as a household cannot partake in one other’s thresholds because the threshold is not cumulative between people. As a result, one spouse may pass the threshold level while the other does not, for instance, if one has, say, €200,000 in invested capital and the other has only €80,000.
Regardless of the amount of capital still owing, the PFU is applicable to assurance vie contracts lasting fewer than eight years. Thus, the pre-27th September 2017 rates described above are replaced by the PFU rate of 30%.
As a result, the following tax rates are applicable based on the contract’s age: 7.5% up to the threshold + 12.8% above the threshold for the first eight years, followed by a Flat Tax rate of 12.8% over the course of eight years.
If you live in France and have an EU S1 certificate proving that you are insured by the healthcare system of another EU or EEA nation, your social charges will be reduced to 7.5%.
The tax of 12.8% or 7.5% (depending on the length of the contract) plus the social costs must be subtracted by insurers. Any excess tax owed is then applied to the taxpayer’s annual declaration for contracts that are more than eight years old and for which the taxpayer has exceeded the threshold.
After the eight-year holding period, all insurances are eligible for a tax-free allowance:
Additionally, after keeping a policy for eight years, regardless of the “premium paid” date, a single taxpayer is entitled to an income tax deduction of €4,600 per year against the gain component of any withdrawals made during the tax year. This rises to €9,200 for a couple that is subject to joint taxation. Therefore, there is no income tax to pay as long as the gain component of all withdrawals made throughout the year does not exceed the allowance.
Are there any further benefits to an Assurance Vie?
The AV is without a doubt useful for estate planning. There are age restrictions, but you can leave up to €152,500 to as many beneficiaries as you choose through an AV policy without any succession taxes being due from any of them. In addition, the rigorous French succession laws do not apply to AV plans. Whoever you choose can inherit your money. If you want to leave more than this to one recipient, they will be subject to taxes on the next €700,000 at a rate of 20% and the amount above that at a rate of 31.25%.
Would I benefit from an Assurance Vie?
An Assurance Vie is a priceless tool that can protect your money and income from needless taxes. Both during your existence and after your passing, it can offer protection for your loved ones. However, because every person’s situation is unique, it is imperative that you get competent financial counsel before investing in this kind of product.
Do not hesitate to get in touch with us if you want to have a private discussion about your circumstances and the options available to you.