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Author Topic: UK Endowment Policy  (Read 1620 times)
nun
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« on: August 31, 2012, 05:38:10 PM »

Over on Britishexpats.com someone asked about how a maturing UK endowment policy is taxed by the US when owned by a US resident. Most people with these seem to be just paying the premiums letting them sit and when they mature and payout they think about dealing with US taxes and presumably pay income tax on the difference between the premiums and the payout after accounting for any foreign tax credits. But is this right? I know that specialized foreign insurance products and a way for US investors to defer tax, but I'm dubious that a UK endowment policy would qualify for tax deferral on annual gains. Also would foreign trust filing and FBAR be required?
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nun
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« Reply #1 on: August 31, 2012, 11:31:01 PM »

I think I've found a question ether too boring or too arcane to get an answer.
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Barcrest
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« Reply #2 on: September 01, 2012, 03:38:03 AM »

I “cashed out” an endowment policy a number of years ago. I paid tax on the gain, taking a credit (1116) against withholding to HMRC. I did file information on the FBAR, with an estimation of the policy worth. The provider, (an insurance company) had no idea what the annual gain/loss was, or the highest value during the calendar year.
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nun
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« Reply #3 on: September 01, 2012, 03:44:44 AM »

I “cashed out” an endowment policy a number of years ago. I paid tax on the gain, taking a credit (1116) against withholding to HMRC. I did file information on the FBAR, with an estimation of the policy worth. The provider, (an insurance company) had no idea what the annual gain/loss was, or the highest value during the calendar year.

Yep that sounds sensible and is the way most people seem to be approaching this. However, is it correct? I would love the simple obvious answer to be the right one, but I've become cynical over the years. Is a UK endowment policy treated like a US policy.....my inclination would be to say that it's possible, but not a given and you'd have to understand the details of the iRS code and the UK policy to make the judgment
« Last Edit: September 01, 2012, 03:46:19 AM by nun » Logged
guya
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« Reply #4 on: September 01, 2012, 07:59:16 AM »

A UK endowment policy would not meet the US definition of insurance.

A policyholder therefore has a foreign investment product.  Each will be different, some might be PFICs.

Under the doctrine of constructive receipt the income paid each year would be taxable as current income; it is less clear if this is PFIC income or ordinary income.

A prudent answer might be to treat it as PFIC income as this gets to the worst possible answer so there would nothing left for the IRS to claim if the return was audited.

Any such policy would have been reportable on the FBAR (certainly since 2007) and is now also reportable on Form 8938.

The PFIC question will become more important from next year when mandatory Form 8621 filing will probably commence.
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nun
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« Reply #5 on: September 01, 2012, 01:46:07 PM »

Guya, Thanks for the answer. You've confirmed my fear that UK endowment policies are not straightforward when it comes to US taxation. Unfortunately many owners of these policies treat them like a US policy because of lack of knowledge and/or the small amounts of annual income and the difficulty of figuring out how they should be taxed.
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Barcrest
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« Reply #6 on: September 01, 2012, 04:04:38 PM »

So I guess those that have an endowment mortgage would be subject to complex reporting also?
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nun
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« Reply #7 on: September 01, 2012, 05:42:07 PM »

So I guess those that have an endowment mortgage would be subject to complex reporting also?

Yes. That was the origin of the question. People with endowment mortgages have the mortgage and the associated endowment policy to deal with. I can think of a few reasons why to a avoid an endowment mortgage, but now I'd add the complications of their taxation for US citizens or residents.
« Last Edit: September 02, 2012, 05:49:34 AM by nun » Logged
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