An expatriate’s guide to French investments

An expatriate’s guide to French investments

Home Finance Investment An expatriate’s guide to French investments
Last update on December 11, 2018

Tax and estate planning figure prominently in the list of priorities of many financially secure expatriate residents of France.

Tax and estate planning figure prominently on the list of priorities of many financially secure expatriate residents of France. The Napoleonic code, which forms the base of succession law in France, produces a fiscal inheritance environment that is completely alien to most of us.

We cherish our right to leave our estate to whomsoever we please and are not happy to discover that, in France, our choice is strictly regulated. Worse still, spouses do not rank highly in the portio legitima in French law. Real estate and capital are the two major concerns, but it should be a relief to learn that mechanisms are available in both areas to help alleviate your worries. This article concentrates on the preservation and development of capital, and explains the huge benefits offered by the French life assurance product, Assurance Vie.

Three important taxes

There are three major taxes that threaten the unprotected capital of even the moderately well-off expatriate in France. Income tax, inheritance tax and wealth tax are all queuing up for a slice of your capital and, if you do not take steps to prevent it, they can make serious inroads into your net worth.

Over the decades, the ever financially resourceful French have 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.

Tax concessions

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 while 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 Even where an amount is withdrawn, only the growth element is then subject to income tax.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 and 8 years old, and 7.5% for all policies over 8 years old. While 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 (single person) or €9,200 (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. It may not be wise to test this system to its limits, but if say €100,000 were invested on day one, and a further €200,000 a year later, the entire fund would still be subject to the lowest tax rates eight years later.

Further benefits of policies

The benefits of Assurance Vie policies are not just restricted to income tax or Capital Gains Tax. In France, succession tax is directly comparable to British 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 where any tax due is then deducted by the notaire from the proceeds of the will.

But with an Assurance Vie policy, the proceeds largely override succession law/tax, which can include overriding children from a previous marriage in favour of the existing spouse if the right steps are taken. Any number of beneficiaries may receive up to €152,500 completely free of tax and pay only 20% on any further amounts received. While changes to the tax regime regarding spouses and children have reduced the impact of this, it still has its advantages for them.

And there are also still huge tax savings to be made when bequeathing legacies to unrelated beneficiaries such as friends or step-children, who would normally pay tax at 60%. There are restrictions to this tax largesse however; the policy must be set up and funded before the policyholder reaches the age of 70. After this age, the tax advantage is restricted to a total of €30,500 for all beneficiaries combined.

Wealth tax

With regards to wealth tax, generally speaking, the value of an Assurance Vie policy is taken into account in wealth tax calculations, but there are circumstances where Assurance Vie can help mitigate wealth tax liability. Some Assurance Vie providers are domiciled outside of France while still offering fully compliant policies, so if you have just moved to France from the UK or are planning to in the future, you can use one of these products to benefit from the recent amendment in the double taxation treaty between the UK and France.

This is because the new version of the treaty allows all assets held outside of France to be exempt from liability to French Wealth for the first five years of your residency in France. Another advantage with the offshore providers is that a few of them are also able to offer French mortgages against the policies, which can also further assist with reducing your wealth tax liability.

How your capital will grow

With regards to how the capital invested inside your policy grows, most Assurance Vie providers have a very diverse portfolio of options available, which will include investments like equities, commodities, ETFs, managed fund, structured products and other fixed interest products. In most cases, there is a very large range of risk on offer, so that both the cautious and the highly adventurous can find a suitable solution, and now there are even funds that will guarantee to preserve and protect a minimum of 80% of your initial capital and accrued gain.

Another investment that is favoured by French providers is Fonds en Euro, which is low-risk and predominantly made up from European Government bonds. However, due to the current Euro zone crisis and the fact that they are the only investment within an Assurance Vie where social charges are deducted annually instead of on withdrawal, the potential returns can be less attractive when compared with the other options mentioned.