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Endowment maturing...IRS implications

Endowment maturing...IRS implications

Old Feb 9th 2011, 5:17 pm
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Default Endowment maturing...IRS implications

Looking through the archives this appears to have last been raised in 2008 but did not produce any answers, so I thought I'd check on any experiences since then.

Next year (I like to plan ahead!) I will have an endowmwnt policy maturing in the UK. I presume the payout will need to be declared on the appropriate tax return, but is it as straightforward as [payout - premiums = income]?

Has anyone done this in the last couple of years? I can see at least a couple of ways to calculate the $ value of the premiums paid - which therefore affects the above calculation. Any experience on what is accepted would be very welcome.

Yes, this is probably a question for a tax advisor (eventually), but there's plenty of time so for now I'm interested in any similar experiences. Thanks.
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Old Feb 9th 2011, 5:30 pm
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Default Re: Endowment maturing...IRS implications

Yes payout - premiums = what is taxable. Or if your insurance company show the profit on the end statement use that.

If you search the IRS web site you can find average exchange rates for the previous 6 years http://www.irs.gov/businesses/small/...206089,00.html

I googled and found figures for the other years and used those. Again if the insurance company show the profit just use the exchange rate on the day you get it. If they don't ask them, they should have the figure to save you trying to work it out.
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Old Feb 9th 2011, 5:31 pm
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Default Re: Endowment maturing...IRS implications

Originally Posted by celticgrid View Post
Looking through the archives this appears to have last been raised in 2008 but did not produce any answers, so I thought I'd check on any experiences since then.

Next year (I like to plan ahead!) I will have an endowmwnt policy maturing in the UK. I presume the payout will need to be declared on the appropriate tax return, but is it as straightforward as [payout - premiums = income]?

Has anyone done this in the last couple of years? I can see at least a couple of ways to calculate the $ value of the premiums paid - which therefore affects the above calculation. Any experience on what is accepted would be very welcome.

Yes, this is probably a question for a tax advisor (eventually), but there's plenty of time so for now I'm interested in any similar experiences. Thanks.
In my inexpert opinion, yes, profit above premiums is taxable (this actually was a letter in the Money section of the Times a while back, wish I had kept it).

As far as converting to $$ is concerned, that is more difficult. I have asked the question of tax advisors before and didn't get a satisfactory answer. What I ended up doing was using the average £/$ conversion over the relevant period. You could do that by creating a spreadsheet and using the following historic record that goes back 40 yrs:

http://research.stlouisfed.org/fred2/data/EXUSUK.txt
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Old Feb 9th 2011, 5:40 pm
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Default Re: Endowment maturing...IRS implications

Originally Posted by lansbury View Post
Yes payout - premiums = what is taxable. Or if your insurance company show the profit on the end statement use that.
Thanks. Hadn't crossed my mind that the paperwork at the end would show 'profit' in that the number would not be taxable, but I guess that makes sense. Like others (from the 2008 thread) this endowment is a left over artefact from better(?) times so the paperwork / process is not one I deal with frequently!

Originally Posted by dunroving View Post
In my inexpert opinion, yes, profit above premiums is taxable (this actually was a letter in the Money section of the Times a while back, wish I had kept it).

As far as converting to $$ is concerned, that is more difficult. I have asked the question of tax advisors before and didn't get a satisfactory answer. What I ended up doing was using the average £/$ conversion over the relevant period. You could do that by creating a spreadsheet and using the following historic record that goes back 40 yrs:

http://research.stlouisfed.org/fred2/data/EXUSUK.txt
Seems things haven't moved forward much since the 2008 thread then


Thank you both for responding.

Last edited by celticgrid; Feb 9th 2011 at 5:40 pm. Reason: typo
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Old Feb 9th 2011, 6:08 pm
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Default Re: Endowment maturing...IRS implications

Originally Posted by celticgrid View Post
Thanks. Hadn't crossed my mind that the paperwork at the end would show 'profit' in that the number would not be taxable, but I guess that makes sense. Like others (from the 2008 thread) this endowment is a left over artefact from better(?) times so the paperwork / process is not one I deal with frequently!



Seems things haven't moved forward much since the 2008 thread then


Thank you both for responding.
I've been trying to get back to the US, but I have two UK endowment policies maturing in 2013 (both with a huge shortfall, of course ).

If I do get a job in the US beforehand, I'm thinking it might just be cheaper to cash them in early, take a hit on the amount but avoid taxes than pay taxes on the whole shebang of profit a year or two after I hit American shores.

Actually, I wonder if there's a case for part of the profit being tax-free because it was earned while domiciled in the UK (the yearly statements could be used to show bonuses earned when in the UK vs when in the US)?

It seems daft that if you own an investment that is tax-free in the UK, for many years, and then if you move to the US in the year you take the profit, you are taxed on the whole thing ... never struck me before.

Last edited by dunroving; Feb 9th 2011 at 6:11 pm.
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Old Feb 9th 2011, 7:05 pm
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Default Re: Endowment maturing...IRS implications

Originally Posted by dunroving View Post
I've been trying to get back to the US, but I have two UK endowment policies maturing in 2013 (both with a huge shortfall, of course ).

If I do get a job in the US beforehand, I'm thinking it might just be cheaper to cash them in early, take a hit on the amount but avoid taxes than pay taxes on the whole shebang of profit a year or two after I hit American shores.

Actually, I wonder if there's a case for part of the profit being tax-free because it was earned while domiciled in the UK (the yearly statements could be used to show bonuses earned when in the UK vs when in the US)?

It seems daft that if you own an investment that is tax-free in the UK, for many years, and then if you move to the US in the year you take the profit, you are taxed on the whole thing ... never struck me before.
I'd like to think the IRS were understanding, but...

Would be nice if you could get a surrender value before leaving the UK and take that as a baseline for profit calculation, but...

Based on experience I'd say there is no 'profit' while it is accruing. The same way interest is taxed at the point it is paid, and the year it is paid, not when it accrues.

The whole US taxation system is taking a bit of getting used to, despite trying to figure out as much as possible ahead of time. Especially as I moved from the Isle of Man where, for instance, capital gains tax is zero. Having got used to that as a way of investing, the US rules mean a significant change of approach to be most efficient.
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Old Feb 9th 2011, 8:46 pm
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Default Re: Endowment maturing...IRS implications

I have a feeling that it is probably a lot more complicated than this.

An endowment is a combination of decreasing term insurance and an investment product.

So if you want to be picky the premium would have to be allocated between the investment element and the insurance element.

Then of course bonuses accrue as the policy proceeds, hopefully annually, so the bonus you had been allocated before you moved should not be subject to US tax as it would be similar any other profit you had made before you were subject to US tax.

Then if it is a low cost endowment there is the terminal bonus, but that reflects the overall fund so I have no idea how you could proportion that.

And you wonder why no 'professional' can give you an answer....
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Old Feb 10th 2011, 7:30 pm
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Default Re: Endowment maturing...IRS implications

Originally Posted by Boiler View Post
I have a feeling that it is probably a lot more complicated than this.

An endowment is a combination of decreasing term insurance and an investment product.

So if you want to be picky the premium would have to be allocated between the investment element and the insurance element.

Then of course bonuses accrue as the policy proceeds, hopefully annually, so the bonus you had been allocated before you moved should not be subject to US tax as it would be similar any other profit you had made before you were subject to US tax.

Then if it is a low cost endowment there is the terminal bonus, but that reflects the overall fund so I have no idea how you could proportion that.

And you wonder why no 'professional' can give you an answer....
Maybe it's just simpler to just not report it.

[Puts on his crash helmet]
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Old Feb 10th 2011, 9:11 pm
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Default Re: Endowment maturing...IRS implications

Originally Posted by dunroving View Post
Maybe it's just simpler to just not report it.

[Puts on his crash helmet]
It did occur to me that this was more a theoretical discussion.

Otherwise there would be a researched answer.
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Old Feb 11th 2011, 4:08 pm
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Default Re: Endowment maturing...IRS implications

Originally Posted by Boiler View Post
I have a feeling that it is probably a lot more complicated than this.

An endowment is a combination of decreasing term insurance and an investment product.

So if you want to be picky the premium would have to be allocated between the investment element and the insurance element.

Then of course bonuses accrue as the policy proceeds, hopefully annually, so the bonus you had been allocated before you moved should not be subject to US tax as it would be similar any other profit you had made before you were subject to US tax.

Then if it is a low cost endowment there is the terminal bonus, but that reflects the overall fund so I have no idea how you could proportion that.

And you wonder why no 'professional' can give you an answer....
Add in the fact that the premiums were subject to tax relief which would also affect the calculation of an 'accurate' cost of the investment...

...and you probably realise why a simplistic [payout - premiums = profit] is the only way to go that avoids madness
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Old Feb 11th 2011, 4:22 pm
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Default Re: Endowment maturing...IRS implications

Originally Posted by celticgrid View Post
Add in the fact that the premiums were subject to tax relief which would also affect the calculation of an 'accurate' cost of the investment...

...and you probably realise why a simplistic [payout - premiums = profit] is the only way to go that avoids madness
Life Insurance is not subject to Insurance Premium Tax.

Simplicity is one thing, there is no realistic chance of that calculation producing the correct number.

There would be a massive difference between for example somebody who moved over the day after taking it out and one who moved over a day before it matured.

And also a big difference between a low cost Endownment and a traditional one.

I think you would need somebody who is an expert in both tax systems and access to a supercomputer.
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Old Feb 11th 2011, 4:29 pm
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Default Re: Endowment maturing...IRS implications

Boiler,

However you work it out you will never come up with an answer that is 100% correct.

As long as the person is happy with the figure they worked out, and can show the IRS, if they get pulled for an audit, that they used a reasonable method on which they based it that's about as good as it gets.
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Old Feb 11th 2011, 4:38 pm
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Default Re: Endowment maturing...IRS implications

Without having some understanding of all the factors, how can you come up with anything reasonable?

I just highlighted the ones that came to my mind immediately, I doubt if I did more than scratch the surface.
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Old Feb 11th 2011, 5:26 pm
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Default Re: Endowment maturing...IRS implications

Originally Posted by Boiler View Post
Without having some understanding of all the factors, how can you come up with anything reasonable?
Then ask the insurance company for a statement showing the "profit" the recipient made on the policy.

I'm sure the IRS would find that reasonable enough.
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Old Feb 11th 2011, 6:08 pm
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Default Re: Endowment maturing...IRS implications

Originally Posted by celticgrid View Post
Add in the fact that the premiums were subject to tax relief which would also affect the calculation of an 'accurate' cost of the investment...

...and you probably realise why a simplistic [payout - premiums = profit] is the only way to go that avoids madness
Every one of my (so far) 500+ endowment premiuns was paid from after tax money, not pre-tax or eligible for tax relief.
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