France v. Luxembourg for your assurance-vie plan
People looking at a move to France must review their tax and estate planning and update investment strategy for the new circumstances.
They will find France offers an invaluable financial planning vehicle which enables them to combine tax planning and investments, at the same time as providing succession planning advantages – assurance-vie.
Assurance-vie life assurance bonds are a popular and effective savings vehicle in France, used by many French nationals to save considerable tax. They are also successfully used by expatriates for tax and succession planning.
There are different types of assurance-vie available; they can be based in various jurisdictions and both the type of product and jurisdiction can make a difference to the advantages they offer. So be careful when selecting which bond to use.
For example, some of the tax advantages are only available to European Economic Area policies, so bonds based in the Channel Islands and Isle of Man do not benefit. UK bonds may lose out too after Brexit; we shall have to wait and see.
French banks offer local assurance-vie policies, but Luxembourg bonds are also very popular here. So, which should you choose, a French or a Luxembourg bond?
Much actually depends on your situation.
The initial investment and incremental investment amounts are generally much lower in France than Luxembourg. So if you are using bonds as a savings vehicle, putting money in regularly to build up for your future, you may find French bonds suit you better. The same applies for smaller amounts.
It is also generally much easier to invest in and top-up a French policy than a Luxembourg one.
If, however, you have a lump-sum to invest, or you have higher amounts of savings, you may want to consider a Luxembourg policy.
Here we look at the key advantages they offer compared to French bonds.
French bonds are usually in euros, while their Luxembourg counterparts can be denominated in another currency.
This does mean that the reporting currency may not be in euros and the growth calculated and then converted into euros. However, this gives a degree of flexibility not usually available from a French bond, and can be useful for expatriates who have capital in other currencies or who want currency diversification.
Breadth of assets
A French bond will not usually have the breadth of assets available within a Luxembourg bond, and will often also hold fonds en euro, where the asset is denominated in euros, rather than expressed as units. Banks will also restrict you to certain investments, rather than having a more ‘whole of market’ general approach. Such funds may not be as flexible or as diverse as those in a Luxembourg bond, where it is also more possible to ‘custom-style’ assets.
Portfolio diversification helps to lower risk, so you want to establish if you can hold a suitable range of funds, tailored to your circumstances, objectives and risk profile, within your policy.
Loi Sapin 2 and freezing bond assets
Last year the government passed an amendment to the “Sapin 2” law which gives the French authorities the power to freeze withdrawals from French assurance-vie contracts. Additionally, they can set the return to be paid by euro funds of local life assurance companies.
We have yet to see if and how this will be used but it is definitely a concern.
If you use a Luxembourg bond, provided the life assurance company is not a Luxembourg subsidiary of a French company, or the fonds en euros are not reinsured in France, this risk is very much diminished.
The Luxembourg ‘Super Privilege’ and ‘Triangle of Security’
France’s investor protection for life insurance bonds, in the event that the company fails, has a limit of €70,000. In Luxembourg, there is no limit to the guarantee so your whole policy is covered.
In Luxembourg, investors in an assurance-vie type of investment are also preferred creditors, being higher up the list than in France, so are more likely to see a return of their funds if there are problems.
Luxembourg’s ‘triangle of security’ surpasses the security offered by France and is superior even to the ‘super privilege’ mentioned above.
The cornerstone of this investor protection regime is the legal requirement that all clients’ assets must be held by an independent custodian bank approved by the state regulator.
The bank is required to ring-fence clients’ securities (investment funds, shares, bonds etc) so they are off its balance sheet. If the bank fails, these securities remain in segregated client accounts. 100% of the policy holder’s securities are therefore protected (note that cash deposits are not securities, although cash held in monetary funds is treated as securities and protected).
New President Emmanuel Macron has promised to reform wealth tax (ISF), so that investment holdings are excluded. In the meantime, though, all your investment capital is included in your wealth tax calculations. Non-French bonds, however, are not subject to wealth tax during the five-year wealth tax ‘holiday’ period.
Finally, it is worth adding that the contract language of a French bond is, of course, French. This is not necessarily the case for Luxembourg bonds, so for most expatriates the small print is somewhat clearer.
Before signing up for any new investment, it is important to read the terms and conditions and risk warnings, rather than relying on what the adviser or investment firm tells you.
Assurance-vie can successfully help you with various aspects of your wealth planning, but remember that your and your family’s situation is unique, so decisions must be made depending on your own unique situation.
This article is by Bill Blevins of Blevins Franks financial advice group who also writes for the Sunday Times on overseas finance. He is co-author of the Blevins Franks guide to Living in France
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.