What is a capitalization contract?

The capitalization contract is a tax package that is often confused with life insurance. Although similar in their general functioning, the capitalization contract fulfils different asset objectives.

Definition of the capitalization contract

The capitalization contract is an investment solution for individuals allowing them to capitalize on various investment products (euro funds, obligations, shares, OPC, stone paper...) under tax conditions that are more advantageous than the CTO (ordinary security account).

The capitalization contract may also apply for a legal entity. Indeed, the latter can in particular be used to manage a company's excess cash flow, whether it is subject to income tax (IR) or corporation tax (IS).

To subscribe to a legal person capitalization contract, the legal person must in principle be:

A non-profit private law organization (association, foundation, etc.)
A company whose aim is to manage its own movable and/or real estate assets (asset management company, holding company, SCI etc.)

The difference between capitalization contracts (funds in euros) and units of account

As with life insurance, the capitalization contract is divided into two main categories:

The fund capitalization contract in euros
The capitalization contract in units of account

The fund capitalization contract in euros is an envelope whose capital is guaranteed, i.e. there is no risk of loss. Inevitably, as a risk-free investment, you should not expect a high return on this type of contract. The latter has generally oscillated between 1% and 2% per year net of fees since 2018 with a downward trend in returns.

Due to the low return on euro funds, we do not recommend that you put all your savings into this type of product to make it a long-term investment. The euro fund can at most be used to invest your precautionary savings as an alternative to passbook A provided, of course, that the withdrawal conditions are flexible enough to react quickly to the unexpected.Finary's opinion

On the other hand, the unit-linked capitalization contract allows you to invest in a wide range of financial and real estate assets (in the form of a rock), but the capital invested cannot be guaranteed. Depending on your investments and your risk profile, you will be able to achieve high returns (up to 10% per year for the riskiest profiles). It remains to know which assets to invest in. To help you, we've written a series of articles on Where to put your money and a guide dedicated tostock market investment.

What is the difference between a capitalization contract and life insurance?

With regard to the functioning and the eligible products of the capitalization contract, it is normal to ask yourself the question of its difference with life insurance.

Thus, as we will see, there are several points that distinguish them mainly when it comes to succession:

The capitalization contract is transferable by way of donation and by succession without causing the contract to be unwound
It is part of the deceased's estate assets, while life insurance capital escapes the ordinary law of inheritance to return to the designated beneficiaries under favourable tax conditions.
it is possible to break up a capitalization contract to consider, for example, a donation with reserve of usufruct (we will come back to this)

What is the taxation of a capitalization contract?

The taxation of the capitalization contract is applicable to total or partial withdrawals made. Of course, the tax is calculated on the part of the income and capital gains generated by your investments and not on all the capital withdrawn.

To find out what taxation is applicable, it is necessary to distinguish between payments made before and after September 27, 2017.

The taxation applicable to withdrawals on payments made before September 27, 2017

For any repurchase of your capitalization contract concerning payments made before September 27, 2017, you have two options:

include your earnings in your annual income tax return (marginal tax bracket)
opt for the PFL (lump-sum discharge)

The PFL of the capitalization contract depends on the length of time of the capitalization contract:

35% for withdrawals made before 4 years
15% for withdrawals made between 4 and 8 years
7.5% after 8 years

Thus, except for highly taxable persons, the PFL of the capitalization contract becomes interesting from the 4th year. In addition, for any withdrawal after the 8th year, you benefit from a deduction of 4,600 euros for a single person (9,200 euros for a married or civil union couple).

Note: the gains from the products of your capitalization contract are subject to social security contributions of 17.2%

The taxation applicable to withdrawals on payments made after September 27, 2017

The introduction of the flat tax by the 2018 Finance Act changed the taxation of capitalization contracts before 8 years.

Now, and only for payments made after September 27, 2017, the taxation of withdrawals from the capitalization contract works as follows:

Before 8 years: 12.8% (flat tax)
After 8 years:
7.5% for income generated on payments of less than 150,000 euros after applying the 4,600 euros allowance (9,200 euros for a couple)
12.8% for income generated by payments over 150,000 euros after applying the 4,600 euros allowance (9,200 euros for a couple)

Likewise, the products generated are subject to social security contributions of 17.2%.

**Finary's opinion**less tax-efficient than the PEAlookout : Despite attractive taxation, the capitalization contract remains. You can also opt to integrate the income from your investments into marginal tax brackets. But, except for being very low in taxation, it is very likely that it is not attractive fiscally.

The advantages of a capitalization contract to anticipate your succession

The capitalization contract is an interesting envelope when it is used for asset purposes. In other cases, life insurance is generally preferred.

Indeed, unlike life insurance, the capitalization contract is transferable. It is then possible to anticipate one's succession by donating the envelope without leading to the conclusion of the contract.

This option prevents you from having to make a total withdrawal (which is taxable under the above conditions) by directly preferring the donation of the contract. In addition, donating a capitalization contract allows you to fully use the special allowances applicable to donations.

You have two options:

the pure and simple donation of the capitalization contract
the donation of bare ownership of the contract with reservation of usufruct

The donation of the capitalization contract

The donation of the capitalization contract involves the payment of transfer duties free of charge. Donation taxes are calculated on the value of the contract at the time of donation (payments + interest).

The advantage of early transmission by way of donation lies in the application of allowances based on the parentage relationship:

100,000 euros for a donation to a child
31,865 euros for a donation to a small child
5,310 euros for a great-grandchild
15,932 euros between brother and sister
7,667 euros for a nephew or niece

This allowance is “rechargeable” every 15 years. However, during these 15 years, the donee will not be able to combine the reduction of the donation and that of the inheritance. In fact, it is in reality an allowance common to donations and successions. To maximize this reduction, it is then customary to anticipate your succession as soon as possible by opening several capitalization contracts to be transmitted every 15 years, for example.

The donation of the capitalization contract with usufruct reserve

In order to minimize the tax base for donations (and therefore maximize the allowance), you can also consider giving only bare ownership of the capitalization contract. We then speak of a donation with reserve of usufruct.

In other words, you keep the usufruct, that is to say the enjoyment of the contract, but you transfer bare ownership of it: the right to dispose of it.

This abstract, but perfectly legal, mechanism makes it possible to lower the fiscal value of the contract at the time of donation. When the usufructuary dies, the capitalization contract is “consolidated” in the assets of the bare owner (the one who benefited from the donation) without involving the payment of inheritance tax!

Thus, the fiscal value of the contract when a donation is made with reserve of usufruct is subject to a discount according to the age of the usufructuary (article 669 of the General Tax Code):

example : on the day you turn 70, you want to anticipate your succession by giving your child a capitalization contract worth 150,000 euros.

In simple donations, gift taxes will have to be paid on a basis of 150,000 - 100,000 (allowance) = 50,000 euros. By giving only bare ownership, the tax base for gift taxes will be:

fiscal value of the bare property: 150,000 x 0.6 = 90,000 euros
taxable base after deduction: 90,000 - 100,000 = - 10,000 euros or 0 euros

Thus, by opting for the donation of the capitalization contract with reserve of usufruct, there will be no gift tax to pay!

**Finary's opinion**Rather than choosing the gift of full ownership, it is better to consider donating a capitalization contract with reserve of usufruct in order to maximize the use of the deduction for transfers free of charge!

Also, the more early you consider your succession, the less important the fiscal value of the bare ownership will be.

FAQ

How to open a capitalization contract? To open a capitalization contract, you can contact a bank, but also insurance companies. Be careful to choose your capitalization contract carefully according to the diversity of available assets and also the management fees charged!

Can several capitalization contracts be opened? Unlike a PEA, you can open as many capitalization contracts as you want. Multiplying capitalization contracts can be interesting, especially if you want to consider an early transfer for each of your children.

Should you invest with a capitalization contract?