Assurance vie

Life assurance (assurance vie) is often used to mitigate inheritance tax and to some extent avoid French inheritance rules.

This works because pay-outs to beneficiaries named in these are not generally considered as being part of the estate for inheritance purposes (except for in the situation mentioned in the section below). You can name stepchildren, for example, as beneficiaries of the policy, and they will avoid paying 60% inheritance tax on their pay-out. It also allows you to leave your own children, for example, more tax-free than is possible with just the inheritance tax allowances.

If the contract is taken out and the premiums paid before the age of 70, the beneficiary will be taxed on the death of the policyholder at a set rate of 20%, after a tax-free allowance of €152,500 (this allowance is per beneficiary – if they benefit from more than one policy, the combined allowance is capped at this amount). A higher rate is applicable for large pay-outs: 31.25% after €700,000.

This tax is applied to the whole pay-out and is taken off by the insurance company or bank if the policyholder is French-resident at the time they die.

If the policyholder was to move back to their country of origin, French tax should not usually be taken off, but some financial experts say there may be complications if the assurance vie is French-based, which is one reason some recommend ones based elsewhere but which have a French fiscal representative to be sure of the right tax treatment for French residents.

If the policy is taken out after age 70, or further investment is made into it after that age, an allowance of €30,500 will be applied to what has been added after the age of 70, after which the normal inheritance tax rates will apply, but the tax is only applied to the amount of the capital sums that were invested and not to interest or capital gains within the policy.

These taxes do not apply if the beneficiary is a spouse or civil partner.

Note that apart from tax, there may also be French social charges payable on money paid out, if these have not already been taken off on an ongoing basis (this relates notably to any parts of an AV invested in the financial or property markets as opposed to in a 'euros fund').

Apart from tax benefits, an assurance vie policy allows the subscriber to indicate, by letter to the insurance company, whom they wish to benefit on their death.

Indeed a beneficiary or beneficiaries in case of death must be named if the payouts are to remain outside the estate.

Note however that where a policy benefits stepchildren, héritiers réservataires could make a legal challenge to have it set aside if payments into it were excessive with regard to quotité disponible rules.

Schemes usually offer a choice of a range of investments, depending on yield required and degree of risk accepted.

The subscriber has the right to withdraw funds at any time and, if the policy has existed for at least eight years, the withdrawal is largely tax-free. (Undistributed income earned on the policy is, however, subject to annual social contributions).

People often use these as an investment. There is no ceiling to investment levels.

Avoid mentioning AV policy in will

Those opting to leave money via an AV policy should avoid mentioning this in their will after a court in Aix-en-Provence ruled in 2018 that such a payout may be deemed a bequest if there is an ‘obvious link between the AV capital and their estate’. It found that dispositions in a certain will concerning an AV policy were equivalent to a bequest despite the fact that AV payouts are usually not deemed to be inheritance and are usually outside the estate for inheritance purposes.

So, it follows that it is best not to refer to AV policies in a will or if you do, you should ensure that you do not use any language that sounds like you are ‘bequeathing’ the money from the AV.