When it comes to personal tax and estate planning, French practitioners frequently turn to life assurance (assurance-vie) as one of the most widely appreciated savings, investment and planning vehicles (investments in French life assurance amount to around €1.5 trillion¹).
The French law on life insurance policy has changed recently (Finance Act 2018), but for French tax residents, regardless of their nationality, life assurance still offer a series of valuable advantages.
In France, withdrawals from an assurance-vie are treated partly as capital and partly as gain. Depending on the date of the payment of the premiums (on or after 27 September 2017) and on how long the contract has been in force, a reduced rate of tax may be payable on any gain.
Indeed, the tax treatment on surrender can be more favourable than with standard savings schemes. The tax advantages include the deferral of tax on income and gains generated by linked investments until funds are withdrawn, the choice between taxation at standard income tax rates plus social contributions or the flat tax rate of 30% (composed of 12.8% of tax and 17.2% of social contributions) and a gain element that could be taxed at rates that reduce as a function of the number of years for which the contract has been held (7.5% after 8 years capped to €150,000).
It is also a useful inheritance planning tool as it is outside the scope of the French heirship rules (i.e. certain reserved heirs have to receive at least a portion of the estate of the deceased), so in theory, the policy holder can leave the funds of the life insurance contract to any beneficiaries of his choice, even if they are not his reserved heirs, except when the premiums are clearly excessive to the lifestyle of the policyholder.
It should however be noted that since the entry in force of the EU Succession Regulation on 17 August 2015, French heirship rules can be circumnavigated by British citizens who opt in their will for the law of their nationality as the devolution law of their worldwide estate. Brexit should not impact the application of this EU Regulation as the UK has already been considered as a Third party by opting out.
On death, provided the policy was funded prior to the 70th birthday of the life assured, succession tax rates of up to 60% can be substituted for the lower beneficiary tax rates of 20% or 31.25%, with a reduction of €152,500 per designated beneficiary.
A policy can be a valuable wealth solution if structured well and appropriate arrangements made at the time of a change of residence. One of the more straightforward and established planning vehicles, it offers the freedom to decide when any chargeable event will ultimately arise and remains portable should the client return home or retire elsewhere. Well advised French resident clients can benefit from the full extent of these advantages, allowing their investments to grow securely and pass safely to subsequent generations.
¹ Association Française de l’Assurance, 26 October 2015