UK life insurance and taxes for US resident
 

Hi all. I asked a question last year about life insurance and wills, but at the time didn't think to delve deeper into the aspect of tax issues, which I hadn't explored enough before. My husband is about to have another birthday, so if we are going to change to a US policy, now is the time before rates go up again.

I'm hoping someone has knowledge of how taxes work if you collect on a UK life insurance policy whilst living in the US (with no residence in the UK).

My husband and I are Americans that lived in the UK for several years, and moved back to the States for good a couple of years ago. We had purchased a life insurance policy before my husband turned 40 while in the UK from Aviva (they let you keep the policy when you move to another country as long as you continue to pay the premiums from a UK bank account, which we do).

We are mulling over whether to cancel this policy and just get one in the US (which I think would be easier to deal with should I ever need to collect on it, and I think it less likely we would run into a problem where the insurer finds some loophole to deny payment -- which hopefully wouldn't happen as I have been assured by Aviva that all is fine). However, I don't know how taxation would work, and the rep at Aviva didn't know, either.

From what I understand, in the UK you are not taxed on up to £325,000 pounds, but the overage is taxed at 40% (our policy is for £500,000). I saw something online to the effect that the non-taxable amount can actually double by the deceased spouse basically transferring his allowance to his spouse, BUT this only applies if you have a permanent UK residence. My husband thinks that since we don't live in the UK, we won't be subject to any tax at all anyhow (but he bases this on assumption).

Also, would there be any US tax ramifications?

To buy a policy in the US now (with my husband a few years older) which gives about $90,000 *less* coverage than our UK policy by today's exchange rate would cost $26 *more* per month. Which is why it's better to keep the UK policy unless it will cause a lot of problems. Can anyone offer some insight?

Re: UK life insurance and taxes for US resident
 

Does the UK really tax a life insurance payout? That sounds pretty callous. "Sorry for you loss now gimme some of that money." How on earth do they justify taxes life insurance??

The IRS says that "in general" life insurance is not counted as income and not taxed.

I would cancel the UK policy after getting TERM life insurance over here. Do not get WHOLE LIFE insurance, it is a scam. The cost of insurnace depends on your age and health, for my 20 year policy I pay $23/month for $500,000 coverage.

Re: UK life insurance and taxes for US resident
 

Is this purely an insurance policy with no investment component?

Re: UK life insurance and taxes for US resident
 

The U.K. does not, in general, tax life insurance payouts as income. However, it may be part of the taxable estate for Inheritance Tax (IHT) purposes. And even though you're likely no longer domiciled in the United Kingdom (you may be deemed domiciled for a few years), IHT will always apply on U.K. situated assets, which may include insurance policies.

There is an IHT exemption for transfers between spouses, but if either or both are not U.K. domiciled, this may not necessarily apply.

These are complex issues and you should get some U.K. tax advice to understand better. As far as I know there isn't normally any specific U.S. tax concern. Life insurance payouts are not normally taxable income, and although they are usually part of the estate for the estate tax, the threshold is over $5m and for U.S. citizens there is a spousal exemption. Do check to see if there is any State inheritance tax to consider.

If you do decide to switch policies, bear in mind that a new U.S. policy is "contestable" for a time period, normally 2 years. If someone dies within that time, the insurer can challenge whether they declared all conditions, etc, when they took out the policy. After the contestability period, they can't do this. So if you do switch, you might want to keep your old policy going for a couple of years, in parallel, if you can afford it. Talk to an insurance agent for more information on contestability periods.

Re: UK life insurance and taxes for US resident
 

I phoned both our UK life insurance company and the UK tax people and was told by both that once you are classed as domiciled in the US then there would be no UK inheritance tax payable on a UK life insurance policy.

I also asked them to send something in writing saying that the fact that we had moved abroad would have no effect on them paying out in the event of a claim, and they did.

Re: UK life insurance and taxes for US resident
 

I also looked into the price of getting life insurance in the US, and despite me getting preferential rates (I work for an insurance company) they were nowhere near as good as the rates we have on our UK policies.

Re: UK life insurance and taxes for US resident
 

If this is a pure insurance policy without, any investment component, then why would there be any tax issues at all....unless the policy were to, unfortunately, pay out.

Re: UK life insurance and taxes for US resident
 

In general, once you are domiciled outside the U.K. then Inheritance Tax only applies to U.K. situated assets. A quick look at HMRC's website did not clarify whether or not a U.K. life policy would be considered U.K. situated.
HM Revenue & Customs:

Note that losing your U.K. domicile isn't quite as simple as changing residence (although it can be done) and you will normally be deemed domiciled for 3-4 years for tax purposes even after you have ceased to be domiciled for general law purposes.

Life insurance is a contract and unless there is a specific term governing this, an insurance company cannot refuse to make payment simply because the policy holder has changed residence. Even if the new address is outside the country.

The only related situation that could cause the company to challenge a claim is if someone emigrated shortly after taking out the policy, to the extent that might allow the company to claim that the individual misrepresented an intention at the time of taking out the policy. However, these cases are unusual and as far as I know would not be supported by the courts unless the evidence was compelling. And in many jurisdictions, if the death occurs more than 1-2 years after the policy was taken out, the insurance company cannot challenge it at all.

Re: UK life insurance and taxes for US resident
 

Yes.

Re: UK life insurance and taxes for US resident
 

It was IHT I was concerned about, and I can't find anything definitive on if you are not domiciled in the uk, does it apply. I called my insurance company (Aviva), and they didn't know the answer on tax and told me to consult a tax professional. However, I don't really know how to find a tax person I can trust to give me correct advice after my experiences when I moved back and hired someone to do my taxes that first year when we had half the year in the uk and half in the US. He assured me he knew how to handle overseas income, but he didn't. I usually did my own taxes, but thought it might be good to let a professional handle it that time for various reasons -- and I had to re-do, point out and fix *so* much of my taxes for him, and not all of it was even to do with overseas income. He just didn't know how to handle anything even marginally uncommon (like income from book royalties). I made five pages of notes about the stuff I had to tell him to correct that he had done wrong. Anyway, that's why I'm asking here, I was hoping people might know from their own experiences.

And I agree about keeping both polices for a time; I had already decided that if we get a US one, I'm still keeping the UK one for the two years it takes for the new policy to be out of its contestability period.

Re: UK life insurance and taxes for US resident
 

See, *that* would make me feel better, but they couldn't tell me about taxes (and I'm sure I wouldn't believe them 100% unless I saw something official that spelled it out, because I've been told wrong things so many times, even on very important issues). I might be able to get them to give me it in writing that they would pay out even though I'd moved.

The UK policy really is much cheaper, at least partly because my husband was a few years younger when he got it. But the whole thing always bothered me a bit, as it didn't let him list a benificiary -- we had to either do a trust (I can't recall why that didn't appeal at the time), or have a will that spelled everything out about where he wanted the money to go. So we made a will, it's still in the UK and our only will at the moment.

I am leaning toward just getting a US policy because *if* I should ever need to collect on it, it will be a stressful, horrible time anyway and it would be nice if the process of filing my claim were as smooth as possible. My husband is leaning toward keeping the UK policy because we get more coverage for our money (unless unforseen taxes take a bite). We may compromise and get a small policy here and keep the UK one, but I don't know yet. The clock is ticking -- he has another birthday soon and I imagine rates will go up again if we don't decide before then.

Re: UK life insurance and taxes for US resident
 

That's the thing, I can't get clarity on the inheritance tax. I don't think we ever were domiciled in the UK though -- we were resident. We had only just gotten our Indefinite Leave to Remain when a job opportunity came up Stateside that my husband couldn't refuse. I can't even remember the specfics anymore of how/why we weren't domiciled, but I believe we were not -- at least I thought we were not.

Re: UK life insurance and taxes for US resident
 

Every case is different, and there's no specific answer, but based on the facts you state, it appears that you probably did not become domiciled in the U.K. for general law purposes. And you wouldn't have become domiciled for inheritance tax purposes unless you were in the country for 17 years. There's information on the HMRC site about domicile if you want to research further.

And even if you had acquired a domicile in the U.K. (unlikely since you didn't take out British citizenship), when you moved out of the jurisdiction permanently you would normally have lost it.

What exactly are you looking to find out about Inheritance Tax? You were given a link to HMRC information earlier, there's also this link: HM Revenue & Customs: Inheritance Tax

An insurance company isn't able to give you tax advice. If you have a technical issue to resolve you could either write to HMRC (they may not respond, however), or seek professional advice from a competent U.K. tax specialist.

By the way, your U.K. will should normally still be valid in your state. Check with a local attorney to see if there is anything state specific that would cause it to be disregarded. However, even if it is acceptable locally - you really do need to replace it with a local will that will be simpler to probate in that state.