What is Assurance Vie? A full explanation of assurance vie
Written by E4E Editor on 21 September 2015
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For people living in France, assurance vie is one of the most important financial products they should consider. But what is Assurance Vie?
Saving tax and effective estate planning are on the main list of concerns of many expatriate residents of France.
The Napoleonic code dictating succession law to French residents can go against peoples actual wishes. To many deciding on whom you leave your estate to is a fundamental choice of life and so having succession laws dictated to them can seem a bizarre concept.
It is not always possible to give the perfect inheritance solution to every given estate as for example property can in particular be difficult to distribute as you would have hoped. Fortunately, there are some financial options available, particularly for private investments, that can go some way in helping to reduce future tax bills and in the distribution of your estates when you die.
Tax benefits of assurance vie
The first point to note is that funds remaining within an assurance vie grow free of French income and capital gains tax meaning that your funds are able to roll up without having concerns of paying these taxes on an annual basis. There is no limit on the amount that can be invested this way. Also any withdrawal from an assurance vie for example investment income on which to live is taxed in an effective and fair manner.
The authorities will look at any withdrawal and decide how much of any withdrawal was return of the original capital you invested and how much was actual taxable growth again reducing future tax liabilities. If you were to simply leave the money in the bank, you would be taxed annually on any interest made whether you take it out of the bank as income or leave it there to grow.
Once the taxable element of your withdrawal has been decided over the first eight years of the plan there is a reducing rate of taxation applicable to this withdrawal at source. Years 1 to 4 are at a rate of 35%, years 4 to 8 at 15% and years 8 and beyond only 7.5%. In the early years it may well be your actual marginal rate of tax is lower than the withheld rate. However, it is possible to be paid gross and add the withdrawn amount into your tax return so you pay your natural rate. If the withheld rate of tax is lower than your marginal rate of tax then this is of great advantage to you paying a lower rate of tax on only part of any withdrawal.
As an added advantage, after year 8, €4600 can be withdrawn annually free of tax (€9200 for a married couple) and anything over this then subject to the above rules and taxes. Clearly this product therefore can become a very efficient way of generating high levels of investment income whilst keeping tax bills low.
Inheritance tax benefits of assurance vie
For inheritance, assurance vie offers some further substantial advantages. Effectively "assurance vie" is a life insurance product it is subject to a different set of rules than your normal estate. In theory assurance vie fall outside of your estate and can therefore be left directly to beneficiaries and not be tangled up in French legal process once you have gone. As it is subject to its own rules it also offers its own additional allowances. As long as the policy is established before your 70th birthday you can name as many beneficiaries as you want to the plan each receiving up to €152,000 tax free on death of the assured and anything over this amount only taxed at 20%.
Frequently asked questions about assurance vie
Q. How do I avoid paying French tax on my investments?
A. Investments in Assurance Vie grows free of tax, while the income you receive will be very tax efficient.
Q. Do I have access to my money?
A. If money is required it is possible to get access. However, as with any investment, this should be viewed a medium to long term plan.
Q. Do I have to invest in euros?
A. Assurance Vie is flexible which means that you can invest in euros, sterling or US dollars.
Q. Is the paperwork going to be in French as I need to be sure I know what I am agreeing to?
A. This will depend on the company you choose Assurance Vie from. It is possible to have the paperwork will be in English if you wish.
Q. I don't want to take investment risk with my money?
A. Assurance Vie is a way of holding money not an investment style. Your portfolio will be held in accordance with how you want your money invested. This could range from capital value guaranteed to high risk funds. Before making your decision your financial adviser will conduct a risk assessment on your situation and make a recommendation, however it is still your choice and should be based on your views and needs.
Q. What happens when if I die with money invested in Assurance Vie?
A. You name who you want to get the funds when you go when setting up the plan or at a later date. Each named beneficiary will receive 152,000 euros tax free with anything over this amount only taxed at 20%. There is no inheritance tax in France between husband and wife or PACS couples.
Q. How did Assurance Vie come about, is it legal?
A. Assurance Vie is the solution the French have developed to the financial problems they face, and are the same financial problems you face as a French resident. It is a cornerstone of French financial Planning and the default investment option of a huge swathe of the French investment market for the tax and inheritance advantages it offers.
Typical examples of how assurance vie works
Take two examples:
1. Mr Smith dies equally leaving €450,000 to three children in an assurance vie. Each would receive €152,500 free of tax and leaving their full circa €100,000 inheritance allowances to be offset against say their deceased Father's property. If this money had simply been in the bank then the full amount would have fallen directly into their Father's estate, used up all of the children’s inheritance allowances and seen a massively increased inheritance tax bill.
2. Mr Clark leaves €200,000 to his step child in an assurance vie plan as he has no children of his own. This would in simple terms see a 20% tax bill on €48,000 being €9,600 total. Imagine the situation where this money was in the bank and would be for the most part subject to a 60% inheritance tax charge as there is no blood line between the two parties giving a tax bill in the region of €120,000 and making the French tax man the biggest beneficiary!
A few final thoughts about assurance vie
In a nutshell, assurance vie offers French residents a tax efficient way of investing/withdrawing money with distinct inheritance tax advantages.
What needs to be remembered is that an assurance vie is simply a special "wrapper". It is not in itself an investment fund or style, it’s a blank piece of paper where an individual can establish a portfolio of investments within a tax favourable environment.
Investments made can range from low risk through to high risk depending on an individual's attitude to risk and their long term expectations and needs for these funds are.
Plans can be held in Euros, Sterling or Dollars so a trade into Euros is not obligatory if you have for example Sterling funds and wish to remain in this currency. Further, many of these plans are also tax compliant should you move elsewhere within Europe as an example back to the UK later.
If you are an expat in France, assurance vie should be a key investment consideration if you are anticipating living there for the long term.
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