How can expatriates in France prepare investments, tax planning and estate planning for volatile times and protect against life’s unknowns?
How can expatriates in France prepare their investments, tax planning and estate planning for today’s volatile times and best protect against life’s unknowns?
These are extraordinary times. A year ago, no-one would have predicted the state of disorder that people, governments, businesses and markets find themselves in today.
2020 has thrown some particularly difficult challenges our way. Brexit was expected. Coronavirus wasn’t. At any time, however, you need to plan for what you know while trying to protect yourself as best you can from life’s surprises.
So if you are living in France, what can you do to try and ‘future-proof’ your finances?
Investing in volatile times
With coronavirus concerns and global trade tensions heightening market volatility, these are challenging times for investors. Is this a bad time to invest? Should you hold your nerve if you are already invested? Unfortunately, there are no simple answers, just good investment principles.
Whatever the market is doing at any given point, the most sensible approach is to invest for the long-term rather than trying to ‘time’ the market.
Financial markets are inherently unpredictable and do move radically and swiftly in times of uncertainty. But reacting to current conditions is usually too late – even experienced investors cannot get this right all the time.
Wise investors are aware of how emotions affect our actions. As markets peak, we may feel excited and be tempted to flood into the market. But this is often the worst time to do so, as markets are likely to be over-priced. Conversely, when markets dip, investors often feel panic and the fight-or-flight impulse urges us to exit the market. This would lock in your losses. For new investors, this would actually be an opportune time to buy shares.
Certainly, from previous events such as the dramatic 1987 and 2008 market falls, we can see that short-term negative reactions are often later reversed by a strong longer-term recovery.
Trying to time the market has plenty of risks, but the biggest may be the risk of missing out. It is surprising the difference certain days in a market cycle can make to returns. If, say, you had invested £10,000 in the FTSE All-Share index for the full ten-year period up to 31 December 2018, you would have earned a profit of £4,754 (excluding fees or charges). But if you missed the ten best days, returns would fall to £2,081. Being out of the market on the best 20 and 30 days would have brought respective losses of £132 and £1,896.
So while it may feel uncomfortable to stay invested when markets fluctuate, this discipline usually produces better returns over the longer term.
Investing in a low interest rate climate
Of course, this is also a time of prolonged ultra-low interest rates worldwide. In the UK you have to go back over eleven years, to January 2009, to find rates over 1%.
As a result, funds in savings, ISA or deposit accounts are failing to keep up with inflation, let alone beat it. At times like this, achieving better returns than bank deposits means widening your investment horizons to consider ‘riskier’ assets. However, this approach will not suit everyone. In any case, it is crucial to factor in diversification and your personal appetite for risk.
As we have already seen, you can reduce risk by being invested for the medium to long-term in a well-diversified portfolio. The key is to spread investments across different regions, asset types and sectors to limit exposure in any one area, using a strategy matched to your particular situation, goals, timeline and risk appetite.
You could also consider spreading the timing of your investments by investing capital in tranches. This ‘pound (or euro/dollar) cost averaging’ approach can help smooth out volatility and potentially improve overall returns over longer time periods.
Tax planning for France
France generally has a reputation for having high taxes, but it can actually be a highly tax-efficient home. Of course, much depends on how you structure your wealth and assets.
There are not many places, for example, where you could potentially pay just 7.5% tax on your entire UK pension fund! To benefit, you would need to take everything out as one lump sum and meet other conditions such as holding the S1 Form (available at UK State Pension age).
French residents can also take advantage of a highly tax-efficient assurance-vie, which can offer additional benefits for your capital, such as estate planning control and currency flexibility.
And yet many UK expatriates overlook such opportunities in favour of retaining UK assets. This approach may become even less tax-efficient when the Brexit transition period ends in December 2020 and UK assets become non-EU assets. With much still unknown about Brexit, now is the time to explore France-compliant alternatives, before your tax position potentially changes for the worse.
Estate planning for France
With good estate planning we can control who receives our legacy and when.
Even after Brexit, you can override France’s ‘forced heirship rules’ by applying the law of your nationality to your estate instead through the EU regulation, ‘Brussels IV’. While this would ensure your legacy is distributed according to your written wishes, this can have unwelcome tax implications.
And, beware, French succession tax can be punishing. You need to be particularly careful where stepchildren and non-blood-related heirs are involved, as they face 60% rates with a very low allowance. Meanwhile, inheritances between spouses/PACS partners are tax-free. Biological children face lower rates and receive higher allowances than other relations.
Fortunately, it is possible to restructure your wealth to reduce succession tax for chosen heirs – and even ensure they receive your legacy when you want them to – so explore your options.
With a careful strategic financial planning review – that considers your investments, tax and estate planning together – you will be best placed to prepare for what’s ahead, both known and unknown. Cross-border financial planning is complex and needs to be designed around your specific circumstances and wishes, so take specialist advice.
Contact a France-based adviser
All advice received from Blevins Franks is personalised and provided in writing. This article, however, should not be construed as providing any personalised taxation or investment advice. These views are put forward for consideration purposes only as the suitability of any investment is dependent on the investment objectives, time horizon and attitude to risk of the investor. The value of investments can fall as well as rise, as can the income arising from them. Past performance should not be seen as an indication of future performance. Summarised tax information is based upon our understanding of current laws and practices which may change. Individuals should seek personalised advice.