What tax envelope should you choose to invest your money?

The ordinary security account (CTO) for a wide range of assets

An ordinary security account (or financial instrument account) is an envelope that allows you to hold a very wide range of financial assets and to invest in the stock market. Actions, obligations, investment funds... This envelope makes it possible to ensure maximum diversification without geographical limitations and investment limits.

Any individual can open an ordinary security account provided they are of legal age (or emancipated minor).

However, the security account does not offer any tax advantages on investment products. Indeed, interest, dividends and capital gains received are subject to ordinary taxation (in principle, flat tax of 30% or marginal tax and social security contributions of 17.2%).

The wide range of assets that can be purchased via a security account makes this envelope essential for building up a coherent financial asset. However, due to the absence of tax advantages, you should rather perceive the title account as an envelope in addition to other tax envelopes (life insurance, PEA) allowing you to increase the diversification of your assets with assets that could not have been accommodated in a PEA (only European shares) or in life insurance (more or less restricted choice of assets depending on the insurer).

In terms of fees, the ordinary security account is one of the envelopes offering the lowest fees (unless you make regular arbitrations since transactions may result in commission payments).

Life insurance to ensure its transmission and build up capital

Contrary to its misleading name, life insurance does not aim to compensate you in the event of death, but to build a portfolio of financial assets that can be passed on to beneficiaries in the event of death. Life insurance therefore has two distinct characteristics:

• a tax envelope allowing you to invest your money in financial assets and, upon total or partial withdrawal (repurchase), to see investment gains taxable at a preferential tax rate from the 8th year (24.7% instead of 30% on the portion of payments under 150,000 euros);
• the possibility of transmitting the capital contained in life insurance to beneficiaries by evading common law fiscal and civil inheritance rules.

On the investment side, life insurance offers a certain degree of investment flexibility:

• Euro fund life insurance where the capital invested is guaranteed (with no risk of loss), but with a constantly decreasing return. However, euro fund life insurance remains an interesting alternative to a bank account to build up your Precautionary savings due to a higher rate of pay (between 1 and 2% net per year). However, be careful that the life insurance contract provides for early withdrawal facilities allowing you to quickly withdraw all or part of your capital.
• Unit-linked life insurance where the capital is generally invested in a selection of investment funds (UCITS, ETF, or even stone paper if your insurer offers it). Of course, in terms of units of account, capital is not guaranteed, but returns are also much higher. If you plan to invest in a broad selection of stocks in a diversified manner through a fund, unit-linked life insurance is a great solution.

If your objective is to invest your money in order to pass it on when you die under favourable tax conditions, the inheritance component of life insurance can also be particularly interesting. In fact, the capital of your life insurance escapes the estate assets to be transmitted to designated beneficiaries with an allowance of 152,501 euros per beneficiary (then a flat rate of 20% up to 852,500 euros). An ideal tool to optimize your estate and/or bequeath part of your assets to friends or distant family members.

The capitalization contract, an asset alternative to life insurance

Unknown to the general public, the capitalization contract works like life insurance allowing both to invest your money in financial assets (euro funds or units of account) and to transmit your assets.

The major difference between life insurance and a capitalization contract is in terms of transmission. In fact, the transmission of premiums for a life insurance contract can only take place upon the death of the policyholder resulting in the termination of the contract (liquidation of investments) and derogatory taxation (since the capital of the life insurance contract does not enter into the estate asset).

In a capitalization contract, the death of the subscriber does not lead to the liquidation of the investments, but his capital enters into the estate asset. The heirs become the new owners of the contract and the assets housed in it. However, unlike life insurance, it is possible to donate the capitalization contract to anticipate your succession. The donation during the lifetime of the subscriber can relate to the full ownership of the contract, or to usufruct or bare ownership to optimize the gift tax.

The PEA and the PEA PME to invest in European equities

The action savings plan (PEA) is a fiscal envelope dedicated to the purchase of European shares or shares in investment funds (UCITS or ETFs) made up of 75% of shares eligible for the PEA. Open in particular with a bank or a specialized broker, it allows you to house listed and unlisted shares up to a maximum payment limit of 150,000 euros. There is also its small and medium-sized company counterpart: the PEA PME ideal for housing shares acquired during a Private Equity transaction. Between them, the payment limit cannot be more than 225,000 euros.

The significant advantage of PEA and PEA PME lies in the exemption from tax on income on investment products from the 5th year, making these tax envelopes essential for investments in shares over 5 years and more. Note in passing that the early withdrawal of payments into a PEA before the 5th year leads to the closure of the plan.

The only problem with the PEA lies in the impossibility of owning anything other than European shares. Thus, if you put all your money into a PEA, your portfolio will not be diversified enough with significant geographic risk and a lack of diversity in asset classes. In other words, you will be 100% exposed to European equities, which is not satisfactory. There are ways to get around this limitation by using synthetic PEA ETFs. Many management companies such as Lyxor or Amundi use this process to offer ETFs on the S&P 500 or the MSCI World.