Last Updated on 1st November 2023
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 Even where an amount is withdrawn only the growth element is then subject to income tax, so for example if your portfolio of assets held within the policy has grown by 50% only this percentage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 so say €100,000 were invested on day one, and a further €200,000 three years later, the entire fund would still be subject to the lowest tax rates eight years after the start of the policy. The effect of investing into a lump sum insurance wrapper is that your applicable tax rate becomes 7.5% on any gains made within the Assurance Vie investment wrapper.
The benefits of Assurance Vie policies are not restricted to income tax or CGT. In France succession tax is directly comparable to UK 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 as opposed to a cap of €30,500 outside of assurance vie wrappers with the remainder being taxed at 60% thus saving significantly.