Understanding Everything about Life Insurance Taxation – BTS Assurance Course

Summary

Taxation of life insurance is a complex domain. It varies depending on several important factors such as the contract opening date, timing of contributions made, and the age of the subscriber. Here is a comprehensive guide to understand the fiscal subtleties of life insurance.

Taxation in Case of Death

Premiums Paid Before Age 70

When a subscriber pays premiums on their life insurance contract before age 70, the applicable death taxation is particularly advantageous. Since July 1, 2014, sums corresponding to the buy-back value of the contract are subject to a 31.25% tax on amounts exceeding €700,000. This means beneficiaries will pay a 31.25% tax on amounts received that surpass this threshold.

For amounts below €700,000, the tax rate is 20%, but only after applying a €152,500 allowance per beneficiary. This allowance is very beneficial as it significantly reduces the taxable base, allowing each beneficiary to receive up to €152,500 tax-free. For example, if a beneficiary receives €200,000, only €47,500 will be taxed at 20% after deducting the allowance.

“Generation” life insurance contracts benefit from an additional tax advantage. These contracts aim to direct household savings toward strategic economic sectors, such as SMEs or social housing. They offer an extra fiscal allowance of 20%, added to the fixed allowance of €152,500. This fiscal advantage makes these contracts particularly attractive for those wishing to optimize the transfer of their estate.

Premiums Paid After Age 70

The taxation of premiums paid on a life insurance contract after age 70 is different and less advantageous. In this case, inheritance rights apply beyond a €30,500 threshold. This means only the first €30,500 of premiums paid are exempt from inheritance rights. Beyond this threshold, premiums are included in the estate and taxed according to the applicable inheritance scale.

However, it is important to note that interest generated by premiums paid after age 70 are not subject to inheritance rights. Beneficiaries do not pay tax on interest accumulated after this age, which can represent a substantial saving.

Life Insurance and IFI

The Wealth Tax on Real Estate (IFI) is a tax that concerns only properties and rights in real estate. Unlike its predecessor, the Solidarity Wealth Tax (ISF), IFI has a broader base focusing solely on real estate. Most life insurance contracts thus escape this tax, which is a significant advantage for policyholders.

However, a notable exception exists for contracts invested in units of account consisting of real estate assets. These units of account can include shares in Real Estate Civil Societies (SCI), shares in Real Estate Collective Investment Funds (SCPI), or shares in Real Estate Investment Organizations (OPCI). When such investments are included in a life insurance contract, they are taken into account for calculating the IFI.

Taxation Threshold

Taxation is triggered when the net value of the taxpayer’s real estate assets exceeds €1.3 million. This means that if the total value of real estate assets, including real estate units of account in insurance contracts, exceeds this threshold, the taxpayer must include these values in their IFI declaration. It is important to note that this threshold applies to net assets, after deducting debts related to real estate assets.

Exceptions and Details

Certain exceptions apply for shares or interests in UCITS invested at less than 20% in properties and rights. Moreover, if the subscriber owns less than 10% of the total UCITS rights, these investments are not included in the IFI base. Similarly, shares in listed real estate investment companies (SIIC) are excluded if the subscriber owns less than 5% of the company’s capital and voting rights.

For subscribers, it is crucial to properly assess the composition of their life insurance contracts. Real estate investments can have a significant impact on overall taxation by triggering the IFI. It is recommended to consult the insurance company’s legal service for precise information about the composition of your contract and whether these investments need to be declared in the context of IFI.

Tax Reduction for Disability Savings Contracts

Disability savings contracts offer specific tax benefits for people with disabilities. These contracts allow a capital payment or a lifelong annuity to a disabled person, providing long-term financial security. The subscriber of these contracts benefits from a significant tax reduction, making these contracts particularly attractive.

Tax Advantages

The tax reduction for disability savings contracts is capped at 25% of contributions made to the contract. However, this reduction is limited to €1,525 per year, plus €300 per dependent child. This means that if the subscriber has dependent children, they can benefit from a higher tax reduction.

Conditions for Reduction

To qualify for this tax reduction, certain conditions must be met:

1. Disabled Person: The contract beneficiary must be a person suffering from a disability that prevents them from engaging in a professional activity under normal profitability conditions.
2. Contract Duration: The contract must have an effective duration of at least six years for the tax reduction to apply.
3. Subscriber and Insured: If the subscriber is different from the insured, the subscriber benefits from the tax reduction.

Survivor Annuity Contract

There is a variation of the disability savings plan called a survivor annuity contract. In this type, the beneficiary must necessarily be a disabled person, and the subscriber is usually a family member (parent in direct line or collateral line up to the third degree). Upon the death of the subscriber, the accumulated capital is converted into a lifelong annuity for the designated disabled beneficiary. This annuity can be combined with other aids such as the Disabled Adult Allowance (AAH).

Subscription Procedure

Any life insurance contract can be eligible for the disability savings option, provided that a request is made to the insurance company managing the contract. This flexibility allows subscribers to choose a contract tailored to their needs while benefiting from the fiscal advantages related to disability savings.

Taxation in Case of Rachat Before 8 Years

When a subscriber decides to make a rachat before their life insurance contract reaches eight years, the applicable taxation depends on the date of the contributions made. The distinction is between contributions made before and after September 27, 2017, each period being subject to different tax rules.

Contributions Made Before September 27, 2017

For contributions made before September 27, 2017, gains realized upon redemption are taxable in two possible ways. By default, they are subject to the progressive income tax scale. This means that gains are added to other income of the subscriber and taxed according to their marginal tax bracket.

However, the subscriber can opt for the Withholding Tax (PFL). The rate depends on the duration of contract ownership:

• Less than 4 years: Gains are taxed at 35% PFL.
• Between 4 and 8 years: Gains are taxed at 15% PFL. This reduced rate makes PFL more attractive for contracts held at least four years.

Contributions Made After September 27, 2017

For contributions made after September 27, 2017, the applicable tax regime is the Flat Tax (PFU), also known as Flat Tax. Gains are then subject to a flat rate of 12.8%. This rate simplifies taxation by offering a flat alternative to the progressive income tax scale.

The subscriber also has the option to opt for progressive income tax on gains, but this choice must apply to all their asset income. This option can be advantageous if the subscriber’s marginal tax bracket is below 12.8%.

Additional Considerations

It is important to note that social contributions of 17.2% are added to the above tax rates, regardless of the tax choice. These contributions are applied to gains upon redemption and are automatically deducted by the insurer.

Taxation in Case of Rachat After 8 Years

When a subscriber makes a rachat after their life insurance contract has reached eight years, the taxation becomes particularly advantageous. From this holding period, the subscriber benefits from an annual allowance on gains, significantly reducing the taxable base.

Annual Allowance on Gains

The subscriber benefits from an annual allowance of €4,600 for an individual and €9,200 for a couple filing jointly. This allowance applies to gains realized during the withdrawals. This means that, each year, the first €4,600 (or €9,200) of gains are not taxable, making partial withdrawals more tax-efficient.

Imposition Rate After Allowance

After applying the annual allowance, remaining gains are taxed based on the total contributions made to the contract :

• Contributions Under €150,000: For contracts with total contributions below €150,000, gains are taxed at a reduced rate of 7.5%. This preferential rate is one of the main advantages of life insurance after eight years, encouraging savers to keep their contracts long-term.
• Contributions Over €150,000: For contracts with contributions exceeding €150,000, gains above this threshold are taxed at the Flat Tax (PFU) of 12.8%. This progressive taxation maintains an advantageous rate for investors with higher investments.

Calculation Example

To better understand, consider an example of a couple contributing €160,000 to a life insurance contract and wishing to make a partial withdrawal after eight years. Assume gains amount to €20,000 for this year. Here’s how taxation would apply :

1. Applying the Allowance: The first €9,200 of gains are tax-exempt due to the annual allowance.

2. Calculating Tax on Remaining Gains: The remaining €10,800 gains will be taxed. For the first €150,000 of contributions, the rate is 7.5%, and for the additional €10,000, it is 12.8%.

   • On €9,200 of gains (up to €150,000 contributions): 9,200 × 7.5% = €690 tax.
   • On €1,600 of gains (beyond €150,000 contributions): 1,600 × 12.8% = €204.80 tax.

Social Contributions

In addition to income tax, gains are subject to social contributions at 17.2%. These contributions are applied regardless of the amount of gains and are automatically deducted by the insurer.

Calculation of Taxable Gains

When performing a withdrawal from a life insurance contract, only a portion of the withdrawn amount is taxed, corresponding to realized gains or profits. This approach protects part of the initially invested capital from taxation. The formula for calculating taxable gains is essential to determine the taxable base on which taxes will be levied.

Calculation Formula

The formula for calculating taxable gains upon redemption is as follows :

Taxable gains=redemption amount− ((total contributions× redemption amount

This formula allows determining the proportional part of gains relative to the amount redeemed compared to the total capital acquired. Here is a detailed explanation of the terms used in this formula :

• Redemption amount: The sum you withdraw from your life insurance contract.
• Total contributions: The total premiums you paid on your contract since its inception.
• Acquired capital: The total value of your contract at the time of redemption, including contributions and accumulated gains.

Calculation Example

To better understand this formula, let’s take a concrete example :

Suppose you paid €50,000 on your life insurance contract and the total value is now €70,000. You decide to make a partial withdrawal of €10,000.

1. Redemption amount = €10,000
2. Total contributions = €50,000
3. Acquired capital = €70,000

Applying the formula, we get :

Taxable gains = €10,000 − ((€50,000×€10,000)/€70,000)

Taxable gains = €10,000 – (€500,000/€70,000)

Taxable gains = €10,000−€7,142.86

Taxable gains = €2,857.14

Thus, on the €10,000 redeemed, only €2,857.14 is considered as taxable gains. These gains will then be subject to applicable tax rates and social contributions.

Importance of Calculation

This calculation is crucial as it determines the portion of capital gains subject to tax, thus protecting the original capital. This makes partial withdrawals more attractive and fiscally advantageous, especially for life insurance contracts that have accumulated significant gains.

Taxation of Annuity Payouts

An annuity payout is taxed annually based on the annuitant’s age at the time the annuity is established :

• Under 50 years: 70% taxable at the progressive income tax scale.
• From 50 to 59 years: 50% taxable at the progressive income tax scale.
• From 60 to 69 years: 40% taxable at the progressive income tax scale.
• Over 69 years: 30% taxable at the progressive income tax scale.

Inheritance Rights on Life Insurance

Life insurance is a popular tool for estate transfer, largely thanks to its tax advantages regarding inheritance rights. Indeed, it allows the transfer of considerable sums to designated beneficiaries with often lighter taxation than traditional successions.

Allowance for Premiums Paid Before Age 70

Each beneficiary of a life insurance contract can receive up to €152,500 without paying tax. This allowance is particularly advantageous as it allows the transfer of a significant capital without heavy fiscal charges.

• Example: If a subscriber designates three beneficiaries and each receives €150,000, no tax will be due, as each beneficiary is below the €152,500 threshold.

Taxation of Amounts Exceeding the Allowance

For amounts exceeding €152,500, a progressive tax applies :

• Amounts between €152,500 and €700,000 are taxed at 20%.
• Amounts exceeding €700,000 are taxed at 31.25%.

Allowance for Premiums Paid After Age 70

For premiums paid after age 70, the fiscal rule changes. The allowance is limited to €30,500 for all beneficiaries and contracts combined.

• Example: If a subscriber contributes €50,000 after age 70, only €30,500 will be exempt from inheritance rights. The remaining €19,500 will be subject to inheritance rights based on the relationship between the subscriber and beneficiaries.

Exemption of Interests

It is important to note that interest generated by premiums paid after age 70 are exempt from inheritance rights. This means only the contributions themselves are considered in calculating inheritance rights, not the accumulated gains.

Calculation Example

To illustrate these rules, let’s consider a concrete example :

1. Premiums paid before age 70 :

   • Total premiums paid: €500,000.
   • Number of beneficiaries: 2.
   • Each beneficiary can receive up to €152,500 tax-free.
   • If each beneficiary receives €250,000, the tax regime will be as follows :
     • €152,500 exempt per beneficiary.
     • €97,500 (€250,000 – €152,500) taxed at 20% for each beneficiary: €97,500 × 20% = €19,500 tax per beneficiary.

2. Premiums paid after age 70 :

   • Total premiums paid: €80,000.
   • Global allowance of €30,500.
   • Amount subject to inheritance rights: $€80,000-€30,500=€49,500$ euros.
   • This €49,500 will be included in the estate and taxed according to the relationship between the subscriber and beneficiaries.

Seizure by the Tax Authorities

A life insurance contract, although often seen as a secure savings refuge, can be seized by tax authorities under certain conditions. This mainly occurs when the subscriber uses the contract fraudulently or conceals income.

Seizure Conditions

A life insurance contract may be seized if the subscriber :

• Uses the contract to organize insolvency: This means the subscriber deliberately places funds in a life insurance contract to avoid their inclusion when settling debts.
• Conceals income from the tax authorities: If the tax authorities discover that the subscriber has not declared all their income, they can seize the contract to recover owed sums.

Seizure Procedure

The seizure of a life insurance contract by the tax authorities occurs within the framework of the public debt recovery procedure. Here’s how it works :

1. Detection of Fraud: The tax authorities detect irregularity, such as income concealment or fraudulent insolvency planning.
2. Assessment of Debt: The authorities evaluate the taxpayer’s debt, including unpaid taxes, penalties, and late interest.
3. Notification: The taxpayer is informed of the imminent seizure. This notification specifies the amounts owed and reasons for seizure.
4. Saisie of the Contract: The tax authority orders the seizure of the life insurance contract up to the amount of the debt. The insurer is then required to transfer the necessary funds to the tax authority.

Limits and Protections

It is important to note that although seizure is possible, legal protections exist for subscribers. For instance :

• Private creditors cannot easily seize a life insurance contract. Such seizure is generally limited and subject to strict conditions.
• The life insurance contract must be used in a legitimate and transparent manner to avoid risk of seizure. Subscribers should declare all income and avoid using the contract for tax fraud purposes.

Example of Seizure

To better understand, consider a concrete example :

• Suppose a taxpayer has a €50,000 tax debt due to income concealment. They have a life insurance contract valued at €100,000.
• The tax authorities can seize this contract up to the amount of the debt, i.e., €50,000.
• The insurer will then be required to transfer these €50,000 to the tax authorities to cover the debt.

Income Declaration

The declaration of income from a life insurance contract is a crucial step for subscribers. These incomes must be declared correctly to avoid issues with the tax authorities. Here is a guide to understand how to declare these incomes and what options are available for taxation.

Declaration Boxes

Life insurance income must be reported in the boxes 2 of the income tax declaration. Specific boxes depend on the nature of the income and the tax choices of the subscriber :

• Box 2CH: Gains from withdrawals before 4 years.
• Box 2TS: Gains from withdrawals between 4 and 8 years.
• Box 2TU: Gains from withdrawals after 8 years, with application of the €4,600 (single) or €9,200 (couple) allowance.
• Box 2CG: Social contributions on life insurance income.

Choice Between PFU and Progressive Scale

At the time of withdrawal, the subscriber must choose between the Flat Tax (PFU) or the progressive income tax scale. This choice must be made at the moment of withdrawal and not when filling out the tax declaration.

Flat Tax (PFU)

The PFU, or Flat Tax, is a single rate of 12.8% applied to gains realized during the withdrawal. In addition, social contributions of 17.2% are applied, bringing the total rate to 30%. This option is often simpler and more advantageous for taxpayers in higher marginal tax brackets.

• Example: For a withdrawal of €10,000 with €2,000 gains, the PFU would apply to the €2,000, resulting in a tax of €256 (12.8%) plus €344 social contributions (17.2%), totaling €600.

Progressive Income Tax Scale

The subscriber can choose to subject gains to the progressive income tax scale. This option is advantageous if the subscriber’s marginal tax rate is below 12.8%. However, this choice must apply to all their asset income for the fiscal year.

• Example: If a subscriber is in an 11% bracket and realizes €2,000 gains, these will be taxed at 11% (€220) plus social contributions of 17.2% (€344), totaling €564.

How to Fill Out the Declaration

1. Identify Gains: Calculate gains realized upon withdrawal.
2. Choose the Tax Option: Decide between the PFU and the progressive scale.
3. Report Amounts: Enter the amounts of gains in the appropriate boxes of the declaration.
4. Apply Social Contributions: Ensure social contributions are also reported.

Practical Example

Suppose a subscriber has made a €15,000 withdrawal, of which €3,000 are gains. The subscriber chooses the PFU for simplicity.

• Gains: €3,000.
• PFU (12.8%): €3,000 × 12.8% = €384.
• Social contributions (17.2%): €3,000 × 17.2% = €516.
• Total taxing: €384 + €516 = €900.

The subscriber should then report the €3,000 in box 2CH, 2TS, or 2TU depending on the duration of ownership, and the social contributions in box 2CG.

Conclusion

The taxation of life insurance is complex and depends on many factors. It is crucial to understand these tax aspects to optimize gains and minimize fiscal burden. For personalized advice, it is recommended to consult a financial advisor.

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