What is an assurance vie and how does it work in France?

Assurance vie, or life assurance, is a popular financial tool in France often used to reduce inheritance tax and, to some extent, avoid French inheritance laws. 

This is because the payouts made to beneficiaries of an assurance vie are generally not considered part of the estate for inheritance purposes. 

For example, stepchildren can be named as beneficiaries of the policy and will avoid paying the 60% inheritance tax that would otherwise apply. 

It also allows you to leave more money to your children, or other beneficiaries, in a tax-efficient way compared to the standard inheritance tax allowances.

Note that a French assurance vie is not equivalent to life insurance in the UK or US, which is known as an assurance décès in France.

Tax benefits of assurance vie in France

If the assurance vie policy is taken out and premiums are paid before the policyholder reaches the age of 70, the beneficiary will be taxed at a rate of 20% on the payout, after a tax-free allowance of €152,500. 

This allowance is per beneficiary, and if they benefit from multiple policies, the combined allowance will still be capped at €152,500. 

For larger payouts above €700,000, the tax rate increases to 31.25%. 

This tax is applied to the entire payout and is automatically deducted by the insurance company or bank if the policyholder is a French resident at the time of death.

However, if the policyholder moves back to the UK, French tax should not be applied, but complications can arise if the assurance vie is France-based. 

Financial experts often recommend choosing a policy based outside of France, but with a French fiscal representative, to ensure the correct tax treatment for French residents.

If the policy is taken out after the age of 70, or if additional investments are made after this age, a tax-free allowance of €30,500 will apply to the amounts added after the age of 70. 

After this, the usual inheritance tax rates will apply, but tax is only applied to the capital invested after 70, not to any interest or capital gains within the policy.

Note that the spouse or civil partner of the policyholder is exempt from these taxes.

Additionally, social charges may apply to payouts if these have not been deducted already, particularly for funds invested in financial or property markets.

Flexibility and investment options in an assurance vie

One of the key advantages of an assurance vie is the flexibility it offers. 

The policyholder can designate beneficiaries in writing to the insurance company, to ensure that the payout remains outside the estate.

In cases where the policy is set up for stepchildren, there could be a challenge from other heirs if contributions to the policy exceed the allowable portion of the estate under French inheritance law (quotité disponible rules).

Assurance vie policies typically offer a wide range of investment options, allowing the policyholder to select the risk level and expected yield. 

Funds can be withdrawn at any time, and if the policy has been in place for at least eight years, withdrawals are largely tax-free, though undistributed income may still be subject to social charges.

Important considerations when leaving money via assurance vie

It is important to avoid mentioning an assurance vie policy in a will. 

A 2018 court ruling in Aix-en-Provence found that a payout from an assurance vie could be considered a bequest if there is a clear link between the policy and the estate. 

To avoid complications, it is best not to refer to the policy in the will, or if necessary, to ensure the language does not suggest the money is being bequeathed.