assurance vie versus internet account for income.

[andy c]

We are moving to France and have to invest some savings. It could be an internet account in the UK and pay the tax in france, or, an assurance vie. Ive done the sums, being paid the interest gross here and then paying tax inc social charges in france versus the vie and, they dont seem that different in terms of income. Why??? Oh I know why, the charges on a vie can be a LOT, if you check out all the small print, and the terms etc are complicated, the moneyh is tied up etc. Wheras the internet account couildn't easier. I'm not persuaded yet. This vie is the Lombard bond one . Does anyone have a better idea or has anyone had bad luck with a vie? Cheers for any advice you lot out there! PS we move in two weeks .

[BJSLIV]

I think that normally the calculation is pretty finely balanced. However not wanting to be too pesimistic the main advantage of avoiding the assurance vie is that if you wanted to get  your money out of France in less than eight years, the fees and taxes would be punitive. I personally would wait and see how things work out in France.

[LesLauriers]

It really depends upon your situation, the UK account will pay around 5% interest which for me in France (2004 tax year) attracts 11% social charges, 8% health charges, and 19.14% income tax, a total deduction of 38.14%. This is payable on all interest received regardless of wether or not I withdraw it.

So £5000 received in UK would attract taxation of £1907.

The same £5000 received in an Assurance Vie would attract taxation of zero if not withdrawn.

£5000 withdrawn from an Assurance Vie would attract taxation at 45% plus health charges of 8% in the first 4 years. If one assumes growth at 4.5% on a capital safe investment then the taxation is as follows:

4.5% of £5000 = £225 taxed at 53% = taxation of £119.25 a saving of £1787.75.

NB this is a simplified calculation real figs would reduce tax further.

After 8 years I can withdraw 9200€ without witholding taxes and eventually an E121 will free me from health charges, so it really is a longer term financial plan as BJSLV states. However after 4 years there could be little difference in taxation even if you withdraw from the Assurance Vie completely and leave France, subject to the values involved and your personal liability to tax, but this is a much more complex calculation.

There are no entry or exit fees on my Assurance Vie, the safe part grew by 4.75% last year and the stock market part by around 20%.

For me it works well but it really does depend upon your personal situation.

[P]

I am still trying to get my head around the various tax situations and I had a meeting with an advisor yesterday.

We need to take an income to supplement our other income (pension the other source). We were advised to place money in several assurance vies and look to the investment for each being for a differing numbers of years. From one of them take the income from it in the first years. If, say, there was 50,000 euros in there and, say, it earned 2,500 euros in the first year and we withdrew 10,500 euros then, for tax purposes, as we have withdrawn a fifth then the taxation would only be applied to a fifth of the interest, i.e. 500 euros. In addition, you can elect whether to have this interest taxed at those associated with interest from this type of account, with its diminishing amount over time OR the relevant household tax rate, which might be less. When drawing on the other assurance vies, electing for the most beneficial tax rate.

I hope the above is understandable and would welcome any comments on the effectiveness of this and also if this actually works in practice.

Leslauriers - you comment on the interest rates that you are achieving - are these rates fairly consistent and what exactly is the risk and what rates do higher risks achieve?

Thanks

 

[Ron Avery]

[quote]It really depends upon your situation, the UK account will pay around 5% interest which for me in France (2004 tax year) attracts 11% social charges, 8% health charges, and 19.14% income tax, a total ...[/quote]

Your tax calculation example is flawed, and possibly your investment decision if you based it on these calculations. 

You are saying that £5000 received in UK would attract total "taxation" of 38.14% , this is not correct, because you are saying that you pay 19.14% on the whole amount of income, that is NOT the case

You do not pay any tax on the first 4334€ per person and only 6.8% on income up to  8254€  ALSO you pay 8% health charges on income over about 5000€, so that part of the calculation is not right either

Have a look at:

http://www.frenchentree.com/fe-legal/DisplayArticle.asp?ID=3915

This shows the complete rates and explains how tax is calculated within a household. Well worth a look 

 

[LesLauriers]

Ron, regrettably I am correct!

My pension uses up all of my allowances and therefore any bank interest is taxed at my highest rate, 19.14% plus of course the social charges of 11%. Again I have already used up the allowance of 6849€ and pay 8% health charges on all interest received.

P,

Your calculation is correct, your investment, having grown by 4.762%, withdrawing 10500€ x 4.762% = 500€ taxable at 46% = 230€ payable plus health charges if applicable.

You can opt to have the withdrawal taxed with income but this losses it's advantage if you have a high tax rate already and after 8 years when the tax free withdrawal commences

Funds in Euros are capital safe, I currently have 4 different providers who last year produced 4.1%, 4.6%, 4.75% and 4.75%. The danger here is that rates could fall and currently anything over 4% is good, considering the bank rate is 2%.

High risk returns? Merril Latin America has risen 67.71% in the last year but could just as easily fall tomorrow - you pays your money etc, Fidlity European has risen by 44.46% and could be considered less of a risk, but it is still a risk.

The big advantage is in the allowances for inheritance tax, and for some the ability for tax planning.

[Ron Avery]

Les

In your example where you, like me, have a pension (which takes up your allowances) and you also receive interest, you are indeed correct, but for those not on pensions or who are "using their capital" and accruing interest on that in the UK, it is a different calculation and certainly not 38% taxation on the interest payments alone,  It would appear that individual crircumstances will dictate the best way to go on this.

[P]

Leslauriers - we were advised that by setting up a number of assurance vies that when you start to draw on each one you can elect how you want it taxed. Hence, in the early years you choose as household taxation (unless you are in the enviable position that this is higher) and leave the others invested for the years in which the tax rates fall with, ultimately, the eight year one being the main source of investment income.

[andy c]

This has been very usefull. I think for me the take home message is that you can earn as much from an internet account and to be frank its safer than bonds etc. The up front costs of a vie detract a lot from the tax benefits that a vie may have, unless you can leave the money to grow, ideally as long as poss...eight years even!

I'm not even convinced re the succession advantages as there are ways around that too at the notaires.

I think, I will leave the money in the internet account until we are in France, and then decide. Thanks for all the advice. Cheers Andrew.

[Evianers]

Do have a look at the information about Assurance Vie on the FrenchEntree website. A possibly important factor in your case is that the proceeds of an Assurance Vie on death are not subject to French succession tax if the policy was set up BEFORE you became tax-resident in France. Note also that you are not restricted to taking out an Assurance Vie policy in France despite what the French authorities might like to think – you could set up one Luxembourg for example. Recommend that you take professional advice before moving to France.

 

HTH

[andy c]

We have had an IFA look at this, and they recomend the VIE. I think the various opinions above prove that there is no right or wrong answer.

Thankyou re the website, I'll have a look! Cheers Andrew

[Robbos]

Guys, one thing to bear in mind when deciding between assurance vie versus a deposit based investment is that some of the latter now come with a "deferred interest" option. 

Britannia International, Nationwide Int. and Alliance & Leicester Int. (all Isle of Man based) all do these. Basically, your interest accrues as per normal (including compounding while not being drawn) but the key difference is that it isn't credited to your account until you ask. 

So if, for instance, you were in your late 50s or early 60s, you need draw only capital until age 65 when, with the arrival of your E121, social and health charges cease and you could draw the interest into the account and pay only basic French income tax on it. A saving of around 15% "tax" every year.

In the intervening years you'd withdraw only capital, content in the knowledge that your interest was waiting in the wings - at least, as safe as the organisation holding it. And if we trust the banks with our capital, there's probably no need to mistrust them with unpaid interest!  

Disadvantages: they're postal accounts, not internet. And with the first two named you have to close the account to get the interest credited. With Nationwide Int., however, you can draw as much interest as you want, anytime you want, so giving you the opportunity to draw just enough each year after 65 to keep your marginal (i.e. top) rate of French tak from straying into the next band.   

Foz'n Robbo 

 

    

 

[LesLauriers]

Foz'n Robbo,

For some this could work, however it is an exchange rate gamble, with the rates over the last 3 years showing a high of 1.60 and a low of 1.37 it's a question of how lucky do you feel.

For me, having changed at 1.595 it could have represented a loss of total capital (and interest gained) of between 10% at today’s rate (12% yesterday) or a loss of 8% against the average €/£ exchange rate over the last three years.

My assurance vie has outperformed the rates shown by Britania.

I will be able to withdraw 9200€ a year free of all taxes from year 8.

Any withdrawal before then pays less tax than a UK investment.

In the event of death I can avoid inheritance tax on the first 150k euros per beneficiary.

In my case I was not prepared to gamble on the exchange rate, and with the benefit of hindsight it has been a good decision. Of course if the £ had increased in value to, say 1.75 €/£ I could be singing a different tune. As I said previously it all depends on your individual circumstances.

Ron,

When living off of capital only the Assurance Vie can still be subject to less taxation than a UK investment at higher values, the breakpoint is around £100k to £150k for a couple, as less of the withdrawal is taxable.

P,

It looks like you have been given text book advice that is accurate to the letter of the policy, I am told however, that in practice, you can change the tax status during the lifetime of the AV. That said, I think that I would follow the advice you have been given.

As said (several times) it all depends upon your personal circumstances and your attitude to risk, for me it works well.