The French parliament finally adopted (on 31.12.2017) a new Finance Bill for 2018 which contain two main changes impacting life insurance solutions for French residents.
First of all, the replacement of the French Wealth Tax by the Real Estate Wealth Tax (so-called “IFI”) for real estate assets held directly or indirectly by a taxpayer. As a general rule, life insurance contracts will not be affected by the new real estate wealth tax regulations. However, real estate investment funds and other real estate linked investments held within a life insurance portfolio will fall within the scope of the new tax regime. A close look at the investments held within such portfolio is recommended to identify the assets which might be affected by the new tax. It will not be difficult for an experienced investment advisor to identify such investments and avoid holding them in the future.
Second of all, the introduction of a global 30% “flat tax” on income and capital gain as from the 1st of January 2018. Previously, the tax regime applied a digressive income tax rate from 35% within the first four years of the contract, 15% from four to eight years and down to 7.5% after eight years, plus 15.5% social contributions. The new flat tax has two components, 12.8% income tax (reducing to 7.5% after eight years) and 17.2% social taxes (increase of 1.7% from previous General Social Contributions). The flat tax will apply on income derived from life insurance policies, but only upon partial or full surrender of the contract. However, the new Finance Bill distinguishes between insurance premiums invested before September 26, 2017 which remain subject to the previous tax regime; and premiums invested after September 27, 2018 which will be subject to the new 30% flat tax. For older life insurance contracts, a policyholder may face two different taxation regimes to cope with!
Comment: Even though it seems to be a major change in taxation of life insurance contracts, the effect is minimal for French resident policyholders and in some cases, beneficial from the previous tax regime. In a nutshell, it makes life easier for both, policyholders and French tax authorities.
Outlook: Life insurance strategies remain a powerful tool for wealth planning, especially for succession planning. Inheritance taxation remains untouched. If the insured person is under 70 years old at the moment when the insurance premium is paid to the insurance company, beneficiaries of life insurance policies will receive benefit payments taxed as follows: first EUR 152’500 free of inheritance tax per beneficiary and, thereafter, a reduced inheritance tax rate of 20% for the portion up to EUR 700’000 and at a rate of 31.25% for amounts exceeding EUR 700’000. For all premiums paid after the insured life reached the age of 70, the benefits received from a life insurance contract will be taxed as follows: first EUR 30’500 free of inheritance tax for all beneficiaries and application of the general inheritance tax regime but only on the amount of premium paid, which means that gains are not taxed.
Compared to the progressive inheritance tax rate which can go up to 60%, depending on the value of assets and the family link with the deceased, there is no better alternative than life insurance strategies for succession purposes. It’s cheaper, easier and faster!
Written by:
Stefan Cvorovic
Your Wealth at a Glance.