Residents of France need to be certain that their investment bonds comply with French taxation legislation. The first thing to do is to consider how the investment bond has been set up- either on a “life assured” basis where the bond contains an element of life cover, or on a capital redemption basis where there are no lives assured. If it is on a life assured basis, the French authorities regard this as being an “assurance vie” and we will consider how this product is taxed. The below does not apply to capital redemption bonds which would not be considered an “assurance vie”.
Offshore investment bonds for French residents are subject to two very different types of tax:
Personal Income Tax.
The rate of Personal Income Tax due on withdrawals or surrenders depends on how long you have held the bond.
|Number of complete years the bond is held||Personal Income Tax due|
|8+||7.5% on gains made which exceed a yearly allowance of E4,600 or E9,200 for bonds held by spouses.|
Social Security Tax.
An offshore investment bond would be deemed to be a “contrats multisupports” since it is not invested in Euros in France The rate of Social Security Tax is 15.5% of the gain made on your investment bond and this is calculated when you make a partial or full surrender. The taxation consequences of both these ways of taking benefits from your investment bond are explained below.
France does not have the cumulative 5% tax deferred allowance which applies to a UK resident. Instead partial withdrawals are taxed as a proportion of the bond gain. The French tax system regards a partial withdrawal as the investor taking back some of their original investment as well as some of the gain from the bond.
This can be understood as follows:
The amount of withdrawal from the investment bond less (amount of withdrawal divided by the full current surrender value of the bond multiplied by the original amount invested).
For example, if the owner of a French qualifying investment bond who originally invested E300,000 which they have held for 5 complete policy years and is now worth E400,000 decides to make a partial surrender of E75,000, we can see the difference in tax treatment between the UK and France.
In the UK the bondholder would be able to apply their cumulative 5% tax deferred allowances. Assuming they have not made any previous withdrawals, this would mean they could apply 5 years of 5% of the original amount invested, which was E300,000 with no immediate liability to income tax. So 5 times 5% of E300,000 allows the bondholder to withdraw 25% of the original amount invested, or E75,000.
This contrasts with the tax treatment for the same scenario for a French resident. Here we take the amount to be withdrawn from the investment bond, which is E75,000 from which we deduct the amount of the withdrawal (E75,000) divided by the current valuation of the bond (in this case E400,000) multiplied by the original amount invested (which is E300,000.
E75,000 – (E75,000 / E400,000 x E300,000) = E18,750
This proportion of the partial surrender which is deemed to be a gain is then taxed at the appropriate rate of French Social Security tax, which is currently 15.5%. So 15.5% of E18,750 is E2,906.25. If this bond has been held for 8 years or more there is no additional liability to the Personal Income Tax since it is below the yearly threshold of E4,600 as explained earlier.
Full surrender of an offshore investment bond:
If the above bond was fully surrendered in the same tax year as the partial withdrawal was made, the tax treatment of any gain also differs between France and the UK.
In the UK the earlier partial surrender of E75,000 is added to the current surrender value of the bond and the original amount invested is deducted.
So, E75,000 + E325,000 less E300,000 gives us a gain of E100,000. This gain can be “top sliced” by dividing it by the number of complete policy years the bond has been held for before this top sliced gain is added to the bondholders income in the tax year of full surrender to see whether it pushes them into a higher rate tax threshold.
Conversely, in France credit is given for the tax paid on the earlier partial surrender before working out additional tax to pay.
Hence we take the surrender value of the bond, which is E325,000 and deduct the original amount invested (which is E300,000) less the earlier withdrawal of E75,000 less the tax paid of E2,906.25.
This gives us E325,000 minus (E300,000 – E72,093.75) = £97,093.75.
This is then taxed at a flat rate of 15.5% to give tax due of E15,049.53.
You can elect to have the proceeds paid to you without tax deducted which you would have to disclose and pay tax on when you submit your annual tax return. Alternatively you can instruct the investment bond provider to deduct the tax and pay the French authorities on your behalf.
Once surrendered, the proceeds become liable to French Wealth tax which is levied on all assets above the Wealth tax threshold as at 1st January. This assumes the bondholder is resident in France. If the bondholder has not been resident in France in the previous 5 tax years no French tax is due. Hence with careful planning it can be possible to mitigate the Wealth tax by changing your country of fiscal residency.
Tax on death
There are two taxes which may apply on the death of the last life assured if they or the nominated beneficiaries are fiscally resident in France and have been French resident for 6 out of the last 10 years before they inherit the investment bond.
- Social Security Tax is levied as explained earlier at a rate of 15.5% on the value of the gain.
- If you have nominated any beneficiaries, they will be subject to “withholding” tax on a tiered scale as follows:
- Up to E152,500: Exempt
- From E152,501 – E852,500: withholding tax is due at 20%.
- Above E852,501: withholding tax is due at 31.25%
There are exceptions to the above and some beneficiaries would be exempt from the above. This would include:
- Spouses or civil partners.
- Brothers or sisters who are single or disabled and have lived with the life assured within the last 5 years.
- Gains made from premiums paid by the last life assured after their 70th
If the bond does not have a nominated beneficiary then reference will be made to your will. If you do not have a valid will the assets will be distributed in accordance with the laws of intestacy.
French Investment Bonds
A couple of investment bond providers have issued “French compliant” investment bonds. The two most widely used products for French residents are from Old Mutual International who offer the French Collective Bond which has access to nearly 1000 funds and the Prudential International who have the International Prudence Bond (France) which offers access to 10 internal funds. Both of these investment bonds are domiciled in Dublin but Old Mutual International also offer an offshore investment bond based in the Isle of Man. You would not become liable for Irish tax unless you became resident in Ireland with a bond based in Dublin. Similarly you would not become liable for Isle of Man taxes unless you became fiscally resident there and your bond was established on the Isle of Man. For an up to date list of available funds which you can access through one of the bespoke investment bonds compliant with the French qualifying taxation rules please feel free to contact us and we will be happy to send you an up to date list.
If you were not resident in France before taking out the investment bond but become French resident later it is essential you tell us so we can review the funds held within your investment bond to ensure compliance.
France has similar taxation issues for offshore bonds as some other European countries, notably Spain, Italy, Cyprus and Malta. We can help ensure that the tax efficiency of your investment bond remains preserved should you become resident in these countries. However, it is vital that you inform us of before you move there so that we can send you a form called P85 which tells HMRC about your change in residency. We need to review the funds held within the bond to ensure it remains “qualifying” and it may be necessary to switch funds before you become resident in France. We also need to ensure the bond provider reports to the tax authorities of the country where the offshore bond is domiciled to ensure compliant reporting standards are met. France will give you an INSEE number, which is similar to the UK National Insurance Number and we need to obtain this, as well as the date your residency changed and your new address. If you have made past “top ups” to the bond in the form of additional contributions, we need to know about these. Once we have ensured compliance with the qualifying rules and you are resident in France, you must let us know before making any additional contributions to the bond.
It is possible to have a French investment bond denominated in different currencies. You can choose UK pound sterling, Euros or US dollars.
Other issues to consider
France has a “Wealth Tax” and you need to be aware of whether your investment bond removes assets from your Estate for the purpose of this tax. We can assist you with this but will need to know more about the basis your investment bond has been established, in particular whether it was set up on a life assured basis or a capital redemption basis.
If you incur a loss from your French bond this cannot be offset against gains from other similar assets.
The above article is based on our interpretation of French law and we cannot accept any responsibility for any actions taken without us giving advice.
This page has been translated into French