theOAP

The information you have been given is correct. JAJ has also commented on your position on the spirit of the treaty. I would guess you may still be somewhat uncertain of a need for a treaty which, as you comment above, 'can be ignored'. You would like the proof.

We first need to establish the US position on the taxation of what it considers 'US Persons'. Any US Person, no matter where the are resident in the world or what their citizenship(s) may be, are subject to US tax. No other nation taxes people in this manner (I ignore Eritrea). In order to preserve this right, the US includes in all treaties to which it is a signatory a saving clause. In the US/UK Treaty, this is found in Article 1(4). There are exceptions in every US Treaty that allows certain sources of income to be termed an exception to the saving clause. In other words, what is written in the treaty does apply for US Persons. These can be found in Article 1(5).

Unless the particular source of income you wish to question is listed in Article 1(5), then the treaty does not apply for a US Person. In essence, for US Persons, the treaty could only be 3 or 4 pages long.

Yes, generally it is a treaty that 'can be ignored' unless your situation falls under one of the excepted sources of income of Article 1(5). All other wording found in the treaty has no bearing on your situation.

R50

Nun

I have been reading your wonderful comment in connection with the above subject. Recently I have come across this article in PDF and it appears that if we have liability for US tax it will be counted as Double Taxation. Pls comment

At the end of each year, each company will calculate the return that it has earned on the investment of with-profits policyholders’ premiums. From this, it will deduct tax at the basic rate, which has to be paid on behalf of policyholders (the eventual maturity value is normally free of tax at both the basic and higher rate).The company will then consider a large representative sample of policies just about to mature and calculate what is called an ‘asset share’ for each. This

consists of the premiums paid:

•

nun

You probably won't be doubly taxed as both the US and the UK allow foreign tax credits. The issue is applying one jurisdiction's tax law to a financial product
in another jurisdiction as it often requires interpretation.

R50

Thanks for your reply.
I do not know how to submit credit to IRS for UK tax charged since Insurance company will not issue 1099 or other form of doc to claim tax credit.

Owen778

Claiming the foreign tax credit itself is easy - you just tell the IRS how much tax you paid to HMRC. The harder part is working out how much you owe the IRS on the foreign income, but you'd have had to do that anyway.

However, assuming you're talking about an endowment, it should be possible to work out your capital gain - just subtract the total amount you put in from the payout at the end. Or are you assuming that the gain on an endowment is taxed yearly as income? I'm not sure why that would be the case.

However, to address your more general point about double taxation: the tax treaty helps avoid you being taxed twice. Unfortunately, investments that are tax-free in the UK and taxable in the US are always taxable in the US.

nun

This has been argued a lot in this thread. The way I see it (and I'm not a professional) is that a UK endowment policy has no special status in the US. Any income and gains are not sheltered from US tax so every year you should pay US tax on them. You don't get to defer tax on gains like you do on UK pensions under the treaty

Owen778

I just went and re-read the whole thread, including my contributions.

Yes, let's not reopen that can of worms.

mrken30

Just another thought. A lot of people bought an endowment as part of a mortgage product. Capital gains on your primary residence are not taxable. I am not sure if you would have been able to get a 25 year endowment without a mortgage. I was unable to claim tax relief on the mortgage interest or do I take that into account when calculating the gains?

Pulaski

All this malarkey just makes me glad that (i) I sold up as soon as I left the UK, (ii) I gave endowment mortgages a wide berth, and (iii) I didn't keep my home and rent it out. That would have been a complete PITA.

global360

I would like to request views on foreign tax credit and UK endowment policies (from the forum, including experts and those who have submitted related US tax returns).

I have a UK qualified endowment policy that has matured this year. The value was $90K and the premiums over the 25 years totaled $60K; I intend to declare the policy gain of $30K as "other income" and pay ordinary income tax.

However, I would like to explore the possibility of claiming a "foreign tax credit" on this UK income via Form 1116.

My justification is as follows: the policy was a"with profits" policy and was invested in a "with profit" Fund. It is clear from the Fund documents and from the insurance company's press releases, that the returns earned in the Fund relating to endowment policies are taxed in the UK. In addition, if I had "assigned" my policy (e.g. just before maturity), the maturity value would have been the same but the policy would have become a "chargeable event" and the insurance company would have issued a "tax certificate" to reflect UK income tax (at basic rate) on the gross returns of the policy. This tax certificate is then normally used to get a credit against UK tax on the policy gains. Unfortunately, I have not had any success in getting the UK insurance company provide me with the same information as they would have included in a "tax certificate". Overall, my point is that the endowment gain is a net, after UK tax, gain. So, in line with the US tax code, and for fairness, could I therefore gross it up by the 20% UK basic tax and then claim the 20% UK tax as a tax credit on Form 1116? In numbers, on Form 1040, I would report gross "other income" of $30K/0.8= $37,500 and then on Form 1116 claim UK tax paid of $7,700. Assuming a marginal tax rate of 30%, this results in total net US of about $3,750 (10% of $37,500) and not $9,000 (30% of $30,000).

Please comment on and critique my proposed approach.

Pulaski

Just because you can claim a tax credit for tax paid doesn't mean you can take an after-tax amount and gross it up to calculate an amount you deem to be tax paid in the UK and set that against your US tax liability.

If you don't have a statement or certificate for the/any tax paid in the UK IMO you are playing with fire if you try to set a notional amount of tax against your US tax liability.

mrken30

Did you take into account the life insurance premiums? They do similar products in the us called whole life policies. I am not sure how they are taxed

Owen778

I'm confused. Did you actually pay UK tax on the gain when it paid out? Most UK endowments are, or at least used to be, qualifying policies, which means UK tax is not payable.

Unless you paid actual UK tax on the gain, I don't understand why you think you'd be able to take a foreign tax credit.

celticgrid

My thoughts too.

Additionally, if I remember correctly, given you took this policy out 25 years ago, there was preferential tax treatment on the premiums. When they changed the rules (can't remember when) existing endowments where the premium was subject to tax relief were grandfathered in and the benefit continued.

General thought...you are taking chances if the IRS were to take an interest in your return.

R50

Based upon my understanding advise by my CPA, endowment policy with profit is an investment for retirement(world wide). Calculated Capital gain must be reported to IRS but if your tax bracket is 15% or below, capital gain is not taxable.