by Bill Blevins
A thorough wealth-management programme needs to consider various aspects, including tax efficiency, income requirements, possibility of above-average returns, inheritance issues, probate, dependents, family requirements and administration simplicity. Many individuals work on these separately or only consider some of them. It is, however, possible to incorporate them all together in one financial planning exercise, one that will be simpler and possibly cheaper than you may expect.
Many British expatriates return to the UK at some point, for example if they suffer from poor health or are widowed, and one should consider this eventuality when setting up financial planning in France.
An example of one device that provides a possible solution to a wide range of taxplanning concerns is the offshore bond. It has a variety of names, including a personal portfolio bond (PPB), a private client portfolio bond (PCP) and a tax ‘wrapper’. In France it is called assurance-vie. This is basically a specialised form of life-assurance arrangement, specifically designed to enable individuals to hold their own choice of assets. This structure benefits from the very advantageous tax treatment afforded to life-assurance contracts in France.
You can hold a wide range of personalasset choices within your offshore bond, including cash, equity and bonds. You must be sure that the bond you choose has been approved for distribution in France to obtain the tax breaks available. It is important to select a bond issuer which will not add extra layers of charges, such as for switching between funds once you have set up your bond.
The offshore bond offers many unique tax benefits, but when held within a suitable trust the advantages are exceptional.
In summary, the benefits of a PPB in France are:
• Income and capital gains:
without any tax planning, any capital gains made on the sale or re-investment of SICAVs, unit trusts etc are taxed at 26%. Even where the income is reinvested or rolled up, dividends are taxable at the normal scale rates of up to nearly 50% plus 10% social charges, as well as full wealth tax. Interest is also taxable at 25%. Holding your assets in an approved PPB can reduce your tax rate on investment income and gains to between 0-18%, and can reduce your wealth tax significantly. If you allow the monies to roll up and do not make any withdrawals you will not need to pay any French income or capital gains tax.
• Withdrawals:
in the event of a withdrawal, either as regular capital or income, the French tax position is highly favourable as only the growth element is liable to tax. The tax rate is further reduced the longer you hold your investment. Within the first four years the total tax rate (income plus social taxes) is 45%. This drops to 25% after four years and to just 17.5% after eight years.
• Wealth tax:
your investment remains liable to wealth tax, but only if your global assets exceed €720,000. Where you have an assurance-vie with a non-French insurance company (which is specifically approved) there is NO wealth tax payable on the investment for the five calendar years following your arrival in France, assuming that you are a British national. (This latter point is a new proposal about to be enacted).
• Succession tax and law:
if you set up the bond before you become French-tax resident, all of it is exempt from both French succession tax and French succession law. Otherwise, it is possible to use the bond to reduce succession tax and avoid French succession law as you nominate who will receive the proceeds when you die. Also, if the payment is made in the event of death, no French income or capital-gains taxes are imposed, though succession tax might be payable. If you have named beneficiaries in your policy, they will each benefit from a succession tax exemption of €150,000. (This exemption does not apply to policies where the life assured is over the age of 70 at the time of subscription.)
• Cost efficiency:
depending on the bond provider, purchases and sales within the policy are usually transacted at very low or even nil cost. If you bought equities, bonds or funds directly the cost could be up to 6% each time you make a change, but if you bought funds within the bond your costs will be reduced to extremely low levels. These savings in charges can easily offset the cost of setting up the bond over time.
Trusts
Assigning your bond to a trust arrangement can create some very unique tax and other advantages. However this is a very specialised field and you have to be particularly careful in France as it has no established trust law and the various types of trusts available are treated differently by the French authorities. It is therefore essential that you seek professional guidance over what is appropriate to your personal circumstances.
As from 1999, new anti-avoidance legislation was introduced whereby where French tax payers have a 10% or more interest in an overseas structure (trusts and/or offshore companies), then French tax is due on the individual’s proportionate share. The aim is to tax the underlying gains in equities, bonds, deposits accounts etc held in a tax haven. It does not, however, apply to assets in a PPB or similar structure.
Some of the advantages of a trust include:
• Income tax:
if the trust is a life-interest trust and the life tenants are not French resident, then no local tax is payable on the income within the trust. If your assets are held in a PPB and in trust, and if you are French tax resident and have not made any withdrawals, then no tax is payable and you benefit from tax-free growth. The same rule applies if you have made withdrawals but have held the policy for more than eight years (as long as it was taken out after September 27th 1997). If held for less than eight years, only the growth is beneficially taxed. • Wealth tax:
shares and interests in trusts and offshore companies are now liable to wealth tax. However, this may not apply to discretionary trusts, provided no payments are made to French residents, or to lifeinterest trusts where the life tenant is not French tax resident.
• Gift tax:
if the recipient has not been French tax resident for six out of the preceding ten French tax years, gift tax is now due.
• Succession laws and taxes:
the assets in the trust are not liable to succession tax in France and a trust can help you avoid the local succession laws.
• Inheritance tax:
if the settlor dies in France as a non-UK domicile there is no liability to UK inheritance tax.
• Probate:
no probate is required and your heirs can obtain benefit from the trust quickly and easily.
• Family situations:
with a trust, the trustees act to look after your beneficiaries without the assets being dissipated. For example, the trustees can ensure that your children do not lose any of the trust assets if they get divorced. The trustees will look after the money if they think any of your dependents could be a spendthrift or simply incapable of managing the money, for whatever reason. The trustees will be guided by you.
• Asset protection:
assets in trust are normally protected from personal creditors. If you are looking for a ‘home’ for your savings assets which is both tax-efficient and capable of producing above-average returns, a personal portfolio bond, with your choice of underlying assets and which is held in trust, is highly likely to be a possible solution to both your tax and financial planning requirements. As always, expert professional advice is essential.
Source: French News
