Have you considered private bank financing as an alternative to conventional mortgage borrowing from a retail bank?
L’impôt sur la fortune immobilière (IFI)
IFI replaced the ISF wealth tax in France in 2018, with only property (real estate) assets liable under the new system. Having a mortgage on your property reduces its net value for IFI assessment purposes and is therefore highly tax efficient, whether the borrowing is a conventional mortgage (with a retail bank) or a ‘back-to-back’ arrangement (with a private bank). More on this later.
Easier and more flexible process
Lending is one way for private banks to increase their assets under management, which involves taking a more flexible view of a client’s overall financial circumstances rather than simply completing a “box ticking” exercise specific to a mortgage application.
A few years ago, we had a prospective client whose business was buying up distressed companies in need of investment. He would inject the required capital and nurture them until they were profitable and then look for suitable buyers. He had been doing this for over 20 years and had made over £30m in profit – all of which was recorded in audited accounts. However, it was capital gain and not income… and all the big French retail banks turned him down for a mortgage because he didn’t meet their minimum income requirements!
Wealthy clients sometimes find that their financial situations are outside of the norm and with retail banks the “computer says no”. Private banks are more likely to offer a solution for these clients.
French residency and/or future retirement in France
If you are French resident or planning to move here, using mortgage finance for a property purchase is often more tax efficient than buying with cash, which can be deployed more productively elsewhere – investing in an Assurance Vie (AV) brings particularly valuable tax advantages as well as other financial planning benefits.
If you have been married before, and/or have children from a previous marriage, you may not be able to leave your wealth to whom you choose (due to French forced heirship rules) – unless you hold an AV. In addition to protecting investment income and gains from annual tax assessments, an AV allows you (not the government) to determine how your wealth is distributed.
Even if your nationality allows you to leave your estate to whomever you choose (which applies if you are British for example), it doesn’t alter the fact that inheritance tax rates get higher, and the allowances get smaller, the less closely related the beneficiary is to the deceased.
If you have remarried and want to nominate stepchildren as beneficiaries, they will pay 60% tax on their inheritance if it is not held in an AV, whereas the proceeds of an AV can be distributed without restriction between children and stepchildren – they all benefit from the first €152,500 being tax free (if the policyholder is under 70 when the money is invested) with the next €700,000 liable at 20% and at 31.25% on amounts above that. This is a much lower tax burden than if their inheritance was not wrapped in an AV.
In terms of investment returns it is reasonable to expect a sensibly managed portfolio to deliver long term growth at a rate that comfortably exceeds the cost of borrowing.
Of course there are no guarantees, but even with interest rates increasing (and taking into account AV charges), there is realistic scope to achieve this positive net return. Successful investing almost always relies on taking a long term view – the longer the timeframe the greater the prospects for success, particularly with professional guidance.
Mortgage borrowing is also generally structured for longer term duration and, with careful planning, can be combined with a suitable investment strategy to produce a cost effective, tax efficient and profitable ‘back to back’ financial plan.
Many private banks offer this type of opportunity. Our role as mortgage specialists and financial planners is to identify the best available options in the market and, most importantly, to examine whether such an arrangement is appropriate for individual client circumstances.