Swedish and living in France
“I wish I had known about this five years ago when I moved here!”
The subject of this quote from one of your compatriates was “Assurance Vie” (AV) but more of this later. If you attended our seminar at Villa Ingeborg at the beginning of November you will know all about it. If you are tax resident in Sweden and just have a holiday home here in France then it is largely irrelevant to you and you can stop reading now – unless of course you plan to move here permanently at some time in the future.
Many people are hesitant about spending too much time here, and therefore becoming tax resident (even if you would like to make this your home), because the perception is that the tax regime in France is punishing. This is a valid perception if you work here and your income is “earned” income because the social charges are high. However if you are retired and your income is derived from pensions and investments then you could be pleasantly surprised to find out that actually your tax and social charge liability is not as high as you thought it would be – particularly if you take advantage of the various tax efficient opportunities that exist here in terms of structuring your wealth.
If you live here and are tax resident here then AV is definitely something you should be aware of and be familiar with because it could save you a substantial amount of money.
If you have decided to live and work, or have decided to retire, here in France it probably means you are financially comfortable. That being the case you have probably commissioned your bank and/or a financial adviser in Sweden to manage your money in an investment portfolio. They are undoubtedly doing a good job for you (otherwise you wouldn’t still be using them) and they are investing your money wisely. You are holding a well diversified portfolio with exposure to equities, bonds and all the other asset classes. The problem you now have is that your adviser is now suggesting you sell something that has given you substantial capital growth. Whilst you have no need to take the money out of your portfolio to spend never the less if you follow their advice you will have a significant capital gains tax liability on the sale. You could have “wrapped” your investment portfolio in such a way that would have meant that you wouldn’t have had any tax liability until you decided to take the money out of the portfolio to spend it – and even then it would have benefitted from a lower rate of tax depending on how long it had been wrapped.
That seems too good to be true? – I hear you say – and what happens if the rules change. It is true that the French government could change the rules and it is rumoured that they will reduce the tax benefits of assurance vie (AV). However it is highly unlikely it will be retrospective and to understand why we need to look at when and why this all started. Back in the 1970’s most western European governments wanted to encourage families to take out life assurance to ensure that, on the death of the income earner, the family was not going to be a financial drain on the state. To do this they introduced a preferential tax regime for life assurance policies.
However they didn’t define life assurance quite as precisely as perhaps they intended. You have life assurance that is pure protection – i.e. you pay your premium each month but it has no value during your lifetime but will pay out a lump sum when you die to make sure your family are financially looked after on your death. You also have life assurance investment plans where the money you have put into them is always available to you during your lifetime but on death will pay out 101% of the value of your investment portfolio. This extra 1% means it qualifies as a life assurance policy and a preferential rate of tax is applied to the proceeds on death. This was clearly not the intention so why haven’t successive governments not closed this “loophole” where you have an investment portfolio masquerading as a life assurance policy? The simple reason is that politicians generally will not do anything to disadvantage themselves and their families even if this means compromising their ideological principles. There are 22 million AV policies in France and it is highly likely that all the members of our present government will have some of their capital wrapped in one.
There is another advantage of having your assets wrapped in an AV policy – unlike unwrapped assets they do not have to follow the French forced heirship rules. If you want to leave your estate to your spouse then you can if it is AV wrapped. Otherwise if you have one child they have to inherit half of your estate. With two children it is 2/3 and with three or more children it is 3/4 divided equally between them. This may not be a problem for you but whilst everything you leave to your spouse is tax free only the first €100,000 you leave to each of your children is free of tax. If you have re-married and have children from a previous marriage then it gets really complicated because anything your children from your previous marriage receive from a “step parent” is liable for 60% tax as there is no blood relationship between the two. With AV wrapped assets you are free to leave them to whoever you choose and the tax they pay (if it is not a spouse) is not determined by how closely related they are.
The bottom line is that investment management is only part of wealth management and that what you have done in Sweden, in terms of structuring your investments, to mitigate tax may not be as tax efficient in France. Clearly assurance vie is more complex than I have space to cover comprehensively in an article like this. However if it is a subject that is of interest to you please contact me and I am more than happy to detail how it could be relevant to your financial planning and remember that existing portfolios can be wrapped without you having to sell everything and then buy it back.
Buying a second home as a summer retreat
You don’t have to be a millionaire to get in on the game. In Southern Europe, particularly in Italy, Spain and France, it is very common for people with ordinary incomes to buy second properties. “They [the French] use them as holiday homes and rent them out when they are not using them,” said Tim Yates, a financial adviser with the Spectrum IFA Group in Valbonne, southern France.