If you are living in France, did you know that a certain large, household name
UK financial institution offers a product locally from Dublin based sister organisations? This product is both EU regulated and tax efficient in France, an Assurance Vie and it is in English.
As a result, should the UK leave the EU, you can still invest with a company whose name you know and trust in a tax efficient manner, in the country you now call home.
So what is Assurance Vie (AV)?
For Brits, an Assurance Vie could be viewed as a sort of ‘big ISA’. It is the tax wrapper ‘par excellence’ for French residents and for the French themselves. Most French families have them, even members of the current government, and at the end of February 2019 total holdings in AV stood at a whopping 1,798 billion EUR! So for the foreseeable future, AV is here to stay.
As a British expatriate resident in France you have a number of international AV policies available to you, all of which are Brexit-proof. Not only are such policies compliant in the European Union, but they work cross border in the UK, so you can take them with you if you change home again or return to Blighty. And while you continue to live in France you have the reassurance that your policy benefits from the advantages of French AV, but not subject to the potentially punitive Sapin II Law which could be used to block French AV policies.
What are the main advantages of international Assurance Vie?
1/ AV has liquidity advantages for better cash flow planning
• Regular withdrawals can be made, making it an ideal vehicle to provide income to compliment your pension and rental income.
• Unlike an investment in rental property, the capital from an AV policy can be obtained relatively simply, quickly – and also partially.
• Wealth Tax (IFI) applies to real estate assets but not financial assets held within an AV policy.
2/ AV takes the hassle and cost out of tax reporting and legal paperwork
• If your investment portfolio is unwrapped (i.e. held directly and outside of an AV tax wrapper), then all transactions must be reported when completing your French tax return. The French tax authorities require all calculations to be reported in Euros, regardless of the currency of the underlying investment, and may also request the translation of various documents. The option of paying an accountant or tax adviser may save time and simplify matters for you, but will increase expense.
• In contrast, if the investments are held within an AV policy, all transactions are grouped for the purposes of administrative and tax returns, regardless of how many purchases and sales of investments occur over the year.
• Also should your priorities change over the years, it is a simple procedure to alter your choice of who will benefit from the money when you pass on. Changing the beneficiary clause within an AV is a simple procedure, and certainly a lot easier and less costly than altering your will with a lawyer.
• Moreover, when the time comes, your beneficiaries need simply apply directly to the insurance company itself. There is no need to pass via a notary to access the funds, the release of which can otherwise be subject to delays especially in the case of complex successions or legal challenges.
3/ AV reduces capital gains tax and investment costs
• When a portfolio is ‘unwrapped’, the sale of any investment triggers tax at the full prevailing tax rate on the resultant gain realised. So, if a portfolio consists of 15-20 lines which are being regularly bought and sold, this can become a reporting nightmare.
• Worse still, it also means that amounts can be taxed, then taxed again, and this perhaps several times over the lifetime of the portfolio. The tax consequences that typically apply to directly held portfolios can become an important consideration for your investment manager, reducing the scope of investments they are likely to consider, therefore potentially hampering performance.
• In contrast, within an AV policy, income tax and capital gains tax are not applied as long as a withdrawal does not occur. Thus, investment funds growing within the tax wrapper accumulate gross and benefit from a ‘compounding effect’ over time.
• And when a withdrawal does occur, only the gain or growth element is subject to income tax, not the capital. The actual liability is determined by how long the policy has been in existence, with the rate payable reducing on a sliding scale which is progressively lower depending on the duration of the policy. After 8 years any withdrawal benefits from an annual tax free allowance of €4,600 of the gain for a single person (€9,200 for a married couple).
• Moreover, a discretionary managed investment portfolio held within a Dublin domiciled AV is not subject to VAT, representing substantial saving on investment management fees.
4/ AV has significant inheritance planning advantages
• Planning who benefits from your estate is complicated in France by the restrictions imposed by the Napoleonic Code. Leaving sums to an unrelated third party such as a friend or unadopted foster child can attract tax of up to a massive 60%, so taking advice is essential.
• In contrast, AV avoids French inheritance law, so any funds held within a contract are effectively taken out of the French succession process.
• Within an AV policy, any number of beneficiaries (related or not) can be appointed and a tax free allowance of €152,500 per beneficiary applies. Above that threshold, a rate of 20% is payable up to €700,000 after which a rate of 31.25% applies. These rates compare very favourably with those that apply outside the wrapper.
5/ AV is more secure than your bank account
• The least customers should be able to expect from their banks is that they are solid and secure, but all is still not well in the banking sector. Since the height of the financial crisis, which began in 2007-08, banks have come under pressure to put their houses in order. In spite of this, a number of big banks have weak balance sheets, and remain technically insolvent. This is not the case of the bigger insurance companies in reputable jurisdictions like Dublin and Luxemburg which are required to maintain minimum capital levels and liquidity ratios.
• There is also a potential risk of levy on client deposits. Customer savings are held on the bank balance sheets as liabilities, not ring-fenced and protected as they are with insurance companies in certain jurisdictions. Therefore, in the event of a bank failure or forced restructuring, customers’ deposits could be at risk, at least partially. Indeed, in the EU there exists a precedent when so-called ‘haircuts’ were taken from personal savings deposits during the Cyprus banking crisis of 2012-13.
• There is now an EU ‘bail-in’ law. On 1 January 2016 the Bank Recovery and Resolution Directive (BRRD) came into force across the EU confirming new bail-in regulations. In the event of a future banking crisis depositors could face having to foot at least part of the bill – in contrast to the government bank bail outs of 2007-2009, when taxpayers’ money was used.
In July 2017, the Financial Times reported that ‘Those who receive financial advice are on average £40,000 better off than those who don’t’. And significant savings can indeed be made on condition you have proper financial advice, solid investments and the right tax wrapper. So do not let Brexit hold you back. The time to make money and save costs is now. Get the right advice, and maybe you too could save £40,000!