I have met many clients, whilst undertaking financial reviews, that hold UK Bonds with Insurance companies such as AVIVA, Friends Life, Prudential and Royal London.
These bonds can have some very attractive tax advantages for UK Tax Residents, allowing for the deferment of paying higher or additional rate tax if you keep to the rules of only taking a 5% annual withdrawal. These bonds also allow you to roll up the 5% so, as an example, if you don’t take it in one year you can take 10% in the following year and so on.
Many UK clients that have now moved to France continue to hold these investments often under the illusion that they remain tax efficient in France and many not realising that the bond actually pays UK tax at source at a rate of 20%. This tax cannot be reclaimed as a non-UK Tax Payer as it’s the bond provider that pays if on behalf of the client at source. Also, any growth on the Bond may also be taxable as a Capital Gain here in France and taxed at the marginal/investment rate.
What options do we have if we hold one of these Bonds?
There is a French compliant equivalent of these bond, known as an Assurance Vie. They are run by well-known insurance companies and are very tax efficient here in France. In fact, as a French Tax Resident, it would be hard to find a product offering more tax advantages than an Assurance Vie is able to provide.
Firstly, from a potential French Inheritance Tax perspective, they are written as a life insurance product meaning that if they are written as joint lives and paying out on second death the proceeds are not added to the estate on first death and if your eventual beneficiaries are non-French Resident, they are paid out immediately, with potentially little to no inheritance tax payable (subject to amounts received and age at investment).
Secondly, the funds grow tax free. The funds are not taxed at source and neither is the bond for either income tax or capital gains tax, therefore when comparing against the UK version of the same product you are already 20% better off.
Thirdly, withdrawals are taxed only on the part of a withdrawal that is classed as a ‘gain’ and can be subject to either your marginal rate or the investment tax rate of 12.8% (plus social charges), if this is lower. This will significantly decrease the amount of tax payable and can really assist in reducing your annual tax liability, especially for those that already have pensions, investments and rental income which may put you into a higher rate tax bracket.
Finally, there is no need to complete monthly returns on gains, as the bond is automatically reported each year to the French authorities making them the easiest of products to administer.
These bonds not only offer some major tax advantages for those that already hold UK versions, but can also be a great home for funds held in cash or in UK ISAs or NS&I products, none of which are tax efficient here in France.
This article is based on the opinion of the financial adviser and author, and does not reflect the views of Blacktower. The above information is based on current legislation which is subject to change and does not constitute as investment advice, or investment research and you should seek advice from a professional adviser before embarking on any financial planning activity.
Blacktower Insurance Agents & Advisors Ltd is regulated in Cyprus by the Insurance Companies Control Service and registered with ORIAS in France. Blacktower Financial Management (Cyprus) Ltd is regulated in Cyprus by the Cyprus Securities & Exchange Commission and is registered with the AMF in France.
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