Taking out an assurance vie policy is a potentially attractive investment product in France, but you need to be careful about how you select your provider, says Duncan Campbell.

Most people on moving to France will have a nest egg comprising capital saved throughout their working lifetime and possibly surplus funds following the purchase of their new home in France.

They will be looking to invest this in the most tax efficient way suitable for a French resident and will discover that an assurance vie is one of the most popular types of long term savings plans in France.

As it has taken a lifetime to accumulate the capital it is extremely important that careful consideration is given to the selection criteria in deciding which assurance aie to take out as there are many imitations available for the unwary.

To help with the selection we thought it might be useful for people in this situation to be aware of just some of the main issues we at Kentingtons use when deciding on who to recommend to our clients.

The following is a checklist and whilst we acknowledge it is not exhaustive we feel it is sufficient to sort a lot of the wheat from the chaff.

1. Does the proposed assurance vie provider have FISCAL REPRESENTATION in France?

Fiscal Representation in France is probably the most important of all the selection criteria. The Client can authorise the assurance vie provider to inform the French Tax Office of any relevant personal tax information regarding withdrawals and deduct both social charges and income tax at the withholding tax rates (see note 3). This by itself will save our Clients a lot of unnecessary work and confusion but in addition both the Client and ourselves will know their assurance vie is compliant with any tax changes regarding French legislation as it is the responsibility of the assurance vie provider to adhere to and keep up to date with any changes.

2. Can they provide tax computations for regular and ad hoc withdrawals to submit with your annual French tax return?

When a withdrawal is made whether ad hoc or on a regular basis it is only the growth element (taxable gain) of the withdrawal that is liable to tax. It is important that the assurance vie provider is able to provide documentation clearly showing the taxable gain element and in a format that is acceptable to the French Tax Office. Some imitations are unable to do this and the unsuspecting investor will find he is taxed on the whole withdrawal!

3. If in conjunction with your adviser you select the withholding tax rates to apply on any withdrawal can the assurance vie provider deduct the due amount at source and deal direct with the French tax authorities without you having to do anything?

As mentioned in 2) above when a withdrawal is made only the taxable gain element is liable to tax. The taxable gain element can be taxed in one of two ways;

i) Income tax is payable at your marginal rate of income tax together with social charges and as in 2) above the figures are submitted with your annual tax return.

Or

ii) Income tax is payable at fixed withholding tax rates together with social charges.

In conjunction with your Financial Adviser it is important that you are able to select whichever option is the most tax efficient.

If the withholding tax rate (prélèvement libératoire) is selected it is extremely important (as well as saving you any hassle!) that the assurance vie provider is able to deduct both the withholding tax and the social charges at source and they will pay the amount to the tax office. You will receive the net amount into your French bank account and not have to declare the taxable gain on your tax return.

Unfortunately an assurance vie imitation will involve you in extra work if you elect the withholding tax option! EVERY time a withdrawal is made you have to complete a Form 2778-SD (together with the correct calculations!) and submit to your French Tax Office within 15 days of the withdrawal. Thus for monthly withdrawals it requires 12 Form 2778-SD being submitted together with 12 tax calculations! (Good luck).

4. Can you invest in both sterling and the euro within the same assurance vie wrapper as well as converting to either in the future?

It is likely that following the sale of your UK property together with other funds your capital will be in sterling. It may be that you wish to invest in an assurance vie but for various reasons ie the current exchange rate you wish to remain in sterling. However your circumstances may change or the exchange rate improves and you may wish to convert some or all of your capital into euros. It is important this option is available and at very attractive rates of exchange. A further important option is the facility to convert back from euros into sterling should circumstances require

5. Does the Assurance Vie allow beneficiary clauses to be used to dispose of death benefits whilst a French resident?

Death benefits under an assurance vie are not subject to forced French Succession Laws and are not disposed of according to the terms of your Will. Instead, in conjunction with your financial adviser under an assurance vie you complete a beneficiary clause stating who your nominated beneficiaries are and specifying the amount each is to receive. If this is not possible it is not an Assurance Vie.

6. Is the Assurance Vie truly portable? In other words if on moving to France will it retain its tax efficiency if one or both of you return at some unknown date in the future to the UK?

On moving to France will your assurance vie be treated as a tax efficient investment and able to provide relevant tax documentation suitable for a French tax resident?

We also want to ensure that should a Client have to return to the UK at some unspecified date in the future the assurance vie will also be treated as a tax efficient investment and able to provide relevant tax documentation suitable for a UK tax resident?

This consideration as well as 4) above is usually sufficient reason for us to discount using an assurance vie provider based in France.

7. Does the assurance vie provider have an extensive range of funds to choose from including both sterling and euro GUARANTEED FUNDS?

Some assurance vie providers, especially French Banks, have a limited range of funds and also they may be in-house. Does the assurance vie provider have a range in excess of 3,000 funds which can be selected from?

In addition does the assurance vie provider, especially for a low risk investor, have access to guaranteed funds such as the Fonds en Euros or Fonds en Sterling?

8. Does the assurance vie provider (as well as the adviser) have a transparent charging structure?

In France there is currently no legal requirement for an adviser to disclose the charges made by the assurance vie provider and also the adviser's commission and how it is calculated. In our experience many advisers, banks and financial institutions tend to amalgamate the costs and leave the hidden costs hidden. At Kentingtons, our ethos is to be absolutely transparent with costs and charges, therefore, we break up how the charges apply so you can see who is receiving what amount and for what service.

9. Is the assurance vie provider based within the EU?

For reasons outlined in 4) and 6) above it is unlikely we would recommend an assurance vie issued by a provider based in France. Instead, we recommend assurance vie providers based elsewhere within the EU. This therefore discounts financial institutions based in the Isle of Man, Jersey or Guernsey as these are Crown Dependencies.

10. Does the jurisdiction where the assurance vie provider is located have an adequate Investor Protection Scheme?

Should a Life Company not be able to meet their liabilities it is vitally important there are regulations and an adequate Investor Protection Schemes in place to protect their policyholders.

For UK based companies the Investor Protection Scheme will pay out 90% of the policy value and for France it is €70,000 per policyholder per institution.

For the reasons outlined in the notes above it is unlikely we would recommend either jurisdiction for investment. As we would not recommend an Offshore centre preferring instead to use a provider based in the EU the choice of jurisdiction narrows down to 2 main countries, Ireland and Luxembourg.

Ireland does not have a formal Investor Protection Scheme. Instead, it is the responsibility of the Insurance Company’s appointed Actuary to certify on prudent assumptions that the company is able to meet all policyholder claims and has maintained the required level of assets, which is known as the “required solvency margin”. Luxembourg has an Investor Protection Scheme of 100% of the policy value.

As our Clients have worked a lifetime to accumulate their capital we consider it our responsibility to protect our Clients as much as we can and for these reasons based on the above, we favour Luxembourg.

11. Does the jurisdiction where the assurance vie provider is located make it compulsory that all policyholder assets are held by an Independent Approved Custodian Bank?

Many Life Offices (not based in Luxembourg) ensure the assets linked to their investment policies are segregated from their business assets by placing them in their Long Term Business Fund. This means that the assets they hold can only be applied for the purposes of meeting liabilities of the investment policies.

A major difference with an Assurance Vie issued by a Luxembourg provider is the assets are not held by the Insurance Company. Instead it is compulsory that the policyholder assets are held by an Independent Approved Custodian Bank for each individual. 100% of the value of these accounts are guaranteed by the Duchy of Luxembourg.

Duncan Campbell
Director
Kentingtons Tax and Investment Consultants