Finance - Reduce Your Tax Liabilities In France

Prospective French property purchasers should consider taking out an assurance vie, a French insurance bond, as it may reduce your French tax liability. By planning ahead and taking out an assurance vie before purchase, the savings will be even greater.

Assurance vie is a specialised form of life assurance arrangement which allows you to hold your own choice of assets as the investment content of the policy.

Holding your assets in the framework of an authorised and approved assurance vie vehicle can reduce your tax rate on investment income and gains to between 0-18%, as opposed to income tax rates which can be as high as 40% or 51% including social charges. If you allow the monies to roll up and do not make any withdrawals, you will not need to pay any French income tax or capital gains tax.

Assurance vie advantages
• There is no French income tax or capital gains tax if the income and gains are accumulated within the policy, and no withdrawals are made.

• Where a withdrawal is made (other than payment on death), it is taxed very favourably. Only the 'growth' element of the amount withdrawn is taxable. So if the whole portfolio of assets within the policy has grown by 7%, only 7% of the withdrawal is taxable.

• The tax rates which then apply to the element of growth, i.e. 7% in the example above, can be at fixed rates of 46% for withdrawals within the first four years, and 26% for years five to eight inclusive, and 18.5% thereafter, inclusive of social charges. If the taxpayer’s marginal rate of income tax is lower than the fixed rates, he can opt for the usual scale rates to apply.

• These tax breaks are exceptionally favourable. As an example, if the investment has grown by, say, 40% after eight years, the effective tax rate on withdrawals would not exceed 7% on any withdrawals while no tax is due on monies that remain invested within the assurance vie contract.

• There are considerable succession tax savings if the assurance vie was established before becoming French resident and the lives assured are under the age of 70 – then there is no succession tax liability on death. If established afterwards, there is an exemption of €152,500 per beneficiary, after which tax is payable at a flat rate of 20%.

• All purchases and/or sales within the policy are normally transacted at no cost. For example, if you were to purchase an offshore fund specialising in fixed interest securities or equities, the cost to purchase such funds directly would normally be up to 6%. This benefit alone can offset the cost of establishing the assurance vie. Switches do not attract any tax liability on profits made when moving from one internal fund to another.

Wealth tax
If you are a UK national and your assurance vie is outside France but remains French taxapproved, you may escape wealth tax on the fund for up to five years.

Wealth tax is payable by French residents where total worldwide assets exceed €760,000 (this includes assests belonging to your spouse or co-habiting partner).

French wealth tax plus income tax cannot exceed 85% of the taxable income. This figure may be reduced to 60% of taxable income in certain circumstances, under new rules introduced in 2006. Because the assurance vie reduces your taxable income, it may also reduce your wealth tax liability, unless you have a significant amount of other taxable income. If your assets exceed €2,339,000, the wealth tax cannot be reduced to less then half of what it might otherwise have been, but this is still a major reduction.

Succession tax
Succession tax is the French equivalent of the UK's inheritance tax.

If a policy is subscribed to before becoming a French tax resident it is free from French succession tax, except where the life assured is over 70 at the time the policy was set up, or when any top-ups are made.

If the assurance vie was set up after you became French resident, any payout on death is not subject to French succession tax but to a flat-rate special tax of just 20%, though if payment is made in event of death there’s no French income tax or capital gains tax. For any named beneficiaries to the policy, there’s a succession tax exemption of €152,500 per beneficiary (not per investor). The beneficiaries can be changed at any time.

The life assured need not be a French resident, nor the same person as the policyholder. The total investments, together with growth, can be drawn from the policy at anytime.

So the potential French tax resident can invest in the fund before taking up residence, thus avoiding tax at the higher rates in the earlier years altogether.

Income tax rates
With careful tax planning, assurance vie can reduce your tax rate on investment income and gains down to between 0-18% typically.

Any monies not withdrawn will be free from French income or capital gains tax.

After eight years, there is an annual deduction available from the taxable element of the withdrawal. This is €9,200 for a married couple, or €4,600 if single or widow or widower.

If a married individual makes a withdrawal of €100,000 after eight years and the growth from inception is 40%, the taxable element of the withdrawal is €40,000. The deduction of €9,200 is then applied, reducing the taxable amount to €30,800; this is then taxed at 18.5%. The tax liability would be €5,698 – an effective tax rate of 5.7% on the total withdrawal of €100,000.

Act early if you want to limit tax on your future investments. When it comes to investments, your financial adviser – and forward planning – can take the worry out of financial planning letting you enjoy life to the full.

Blevins Franks Tel: 020 7015 2126 www.blevinsfranks.com

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