In a world where international mobility is an important part of our lives, more and more of us live, or have lived, in a country we were not born in, including myself. As we move around the globe, we are likely to invest in various products and wrappers which at the time make sense, but do they still offer a good investment solution after moving again?
For example, if you have lived in France, you are highly likely to have invested in a French or Luxembourg Assurance-Vie (AV). If you have moved to the UK, or if you are planning to do so, you may wish to review if this structure will still be suitable for you.
What is an AV?
An AV is the preferred investment structure in France. Similar to an offshore bond in the UK, it allows the invested funds to grow tax-free while they are kept in the wrapper.
Whilst French and Luxembourg AV are both treated the same way, if you reside in France the French version will be cheaper but have a reduced range of investments available. The Luxembourg AV is typically more expensive, but can be denominated in currencies other than Euros, have more investment options and tend to be more adaptable in case of mobility.
Both French and Luxembourg AV are often used as collateral for borrowing. In France, banks will often offer to combine a mortgage and an investment in an AV as security alongside your home. This is unlike other jurisdictions such as the UK, where mortgage rules differ.
Why was the AV a good choice when you were French resident?
Tax free growth
As long as your money stays in the wrapper, there is no tax to pay. You will only be taxed upon withdrawal of the funds, allowing you to control when you pay the tax.
Withdrawals
Whilst being tax resident in France, each withdrawal above €4,600 each year will be treated as comprising both one part of the original capital and a portion of gain. You can withdraw an amount at any time, but withdrawals will always take out both capital and gains. Only the gain portion will be taxed.
France changed the rules for AV investments in 2017, so it is advisable it check the rules to ensure that your understanding is up to date and seek expert advice if you are unsure.
If you are French resident on the date of withdrawal:
Investments made before 27/09/2017
Only the gain portion of the withdrawal will be taxed at source on a time scale system whereby (in addition to 17.2% of social contributions):
- the first 4 years will be taxed at 35%;
- 4 -8 years at 15%; and
- 8 years and over at 7.5%.
Alternatively, you may elect to have the withdrawal paid gross and add it to your tax return, meaning that you will pay based on your normal rate of income tax. You have this choice on every withdrawal independently from the previous one – incidentally in the early years this might be preferable.
Investments made after 27/09/2017
Only the gained portion of the withdrawal will be taxed at a flat rate of 30% (12.8% of income tax plus 17.2% of social contributions). For an AV where the total premiums paid in is less than €150,000, after 8 years income tax is charged at 7.5% instead (still with 17.2% of social contributions).
Please note that this only applies if you are French resident. If you are resident outside of France, you should seek local tax advice before taking any action. For example, the rules are very different for UK residents and bespoke advice is recommended for those holding these investments to fully understand the differences and options.
Inheritance
If you live in France or plan to, an AV offers substantial inheritance planning advantages subject to it being set it up before your 70th birthday. An AV is treated outside your estate and, therefore, paid out more quickly to beneficiaries. In addition, you can nominate as many beneficiaries as you wish. Each beneficiary will receive up to €152,000 tax free, with the balance taxed at 20%. (Note that this is far less advantageous if set up after 70).
Please note that this only applies if you are liable for IHT in France. Again, if you are resident outside of France and subject to IHT in a different jurisdiction, you should seek tax advice locally. For example, the above will not apply if you are subject to inheritance tax in the UK at the date of your death. It is worth checking with your international adviser if you hold such a product and are near or beyond 70 years of age.
Other challenges and examples of what to look for as a UK resident
The Personal Portfolio Bond
A Luxembourg AV is more flexible and is likely to follow the taxation rules of the country you are resident in when making the withdrawal. A Luxembourg AV also allows many more types of investments and, therefore, is typically more at risk of being regarded as a Personal Portfolio Bond, which can have negative tax consequences for a UK resident. If in doubt, contact your adviser who is familiar with both offshore bond rules for UK residents and the structure of Luxemburg AVs.
Claiming the remittance basis
Individuals claiming the remittance basis cannot exclude gains from AV withdrawals, contrary to what many people may believe.
More importantly, if you intend to use the funds in the UK, it is paramount to assess the source of the funds as you may not be able to remit the funds to the UK post withdrawal even if you have paid tax on the gain part of the withdrawal.
Use as collateral for a loan
Unless you have assessed the source of the funds for an AV investment, it is not advisable to use the AV as collateral or guarantee for a loan or mortgage that will be used to remit funds into the UK. At worst, the entire policy may be deemed to have been remitted and you could be liable for a remittance tax charge, even if you are filing on the remittance basis.
If you are UK resident, we recommend seeking expert advice prior to investing, withdrawing, or surrendering an AV policy. There are often ways to optimise your tax position on such policies or chargeable events, especially when considered as part of your holistic financial planning. This requires adequate knowledge on the product types and jurisdictions involved.
Conclusion
Optimising your financial position when moving across borders or when holding assets in different jurisdictions can be complex. Our specialist advisers have the experience and qualifications to support you though the process, partnering with suitable tax and legal specialists in a collaborative team to work on your behalf.
Adrien Landreau
Partner
alandreau@partnerswealthmanagement.co.uk
020 8051 9452
The contents of the article have been prepared solely for information purposes. The article contains information on financial products and services and such information is designed for and addressed solely to individuals seeking generic industry information. This document reflects our understanding of current legislation. Past performance is no guide to future returns. Taxation is dependent on individual circumstances and may be subject to change. The value of investments may go up as well as down.