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UK Mortgage Endowment Policy and US Tax

UK Mortgage Endowment Policy and US Tax

Old Aug 31st 2012, 11:59 am
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Exclamation UK Mortgage Endowment Policy and US Tax

I've been living in the US since 1999 and sold my house in the UK in 2001 but kept up the payments on the endowment policy I had for the mortgage - not sure why but it seemed like a good idea at the time. The endowment policy matured this month and I received a payment (inevitably much less than originally promised).

I thought I'd think ahead and figure out how this payment should be reported on my tax return for this year, but having scoured the web it seems like no-one knows the answer to this and that there's only 2 or 3 people that have ever had the problem. This seems unlikely given the number of UK expats over here. So does everyone just forget about it when they do their US tax return? I have to believe there are some people out there who have had this problem and successfully reported the payment in a way that the IRS accepted.

Foolishly or otherwise I really do want to do the right thing and pay any tax due. Does anyone have any ideas / experience or names of tax lawyers that could provide any clarity? The IRS web site does not seem to address this anywhere that I can find, which I suppose is not entirely surprising.
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Old Aug 31st 2012, 12:35 pm
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Default Re: UK Mortgage Endowment Policy and US Tax

It must be declared on your US tax return and you will have to pay tax on any gain.
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Old Aug 31st 2012, 12:43 pm
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Default Re: UK Mortgage Endowment Policy and US Tax

This has been asked before - I know, because I have asked it! I have an old endowment that matured this current tax year.

There is, to my current knowledge, no specific answer. Lots of variations on the theme as to how you calculate the gain, but essentially that gain has to be declared on your tax return.

My plan is to clearly document how I reached the number that I will report and file that away with the tax paperwork should it ever be needed. Which I doubt.

Of course, I hope I am wrong, and that someone proves me wrong, because to do so they'd have to uncover and explain exactly how it should be calculated
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Old Aug 31st 2012, 12:48 pm
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Default Re: UK Mortgage Endowment Policy and US Tax

Originally Posted by celticgrid View Post
This has been asked before - I know, because I have asked it! I have an old endowment that matured this current tax year.

There is, to my current knowledge, no specific answer. Lots of variations on the theme as to how you calculate the gain, but essentially that gain has to be declared on your tax return.

My plan is to clearly document how I reached the number that I will report and file that away with the tax paperwork should it ever be needed. Which I doubt.

Of course, I hope I am wrong, and that someone proves me wrong, because to do so they'd have to uncover and explain exactly how it should be calculated
Don't forget FBAR if it is deposited into a UK bank account...assuming all world wide accounts total over $10K.

Last edited by Jerseygirl; Sep 1st 2012 at 1:09 pm.
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Old Aug 31st 2012, 1:09 pm
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Default Re: UK Mortgage Endowment Policy and US Tax

Interesting question and one we will have to deal with in 2 yrs time. We ended up taking out another mortgage as we could see the payments weren't going to cover the mortgage - by about 50%! So would there be any gain if it doesn't actually cover what it was meant to pay? I think we will have a whooping 3000 extra above our payments once it is paid out. Yeah, it was that bad!
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Old Aug 31st 2012, 2:11 pm
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Default Re: UK Mortgage Endowment Policy and US Tax

You have two issues, the sale of the house back in 2001 and the endowment policy.

If there was any capital gain when you sold the house you should have declared that on your US taxes using the relevant exclusions if the property was your primary residence.......not sure that's applicable as you were living in the US and the property was in the UK.

Next is the endowment policy. Foreign life insurance policies are actually used by US residents to get tax deferred gains. As long as the foreign policy complies with IRS regulations the gains can be US tax deferred, I think it needs to be a foreign non-grantor trust. I do not know if your UK endowment policy meets the IRS requirements. If it does not you'd have to pay tax on the gains each year so they would not be tax deferred. If it does meet the requirements for tax deferred gains then you'd just pay income tax on the difference between your premiums and your payout in the year the policy matured.

I believe that foreign insurance policies, annuities and trusts also have to be declared on FBAR if the usual $10k threshold is met. So they need to go on FBAR before they mature.

http://www.taxbarron.com/articles/annuity_taxation.php

I'd ask you question over at uk-yankee as there are some very knowledgeable people there

http://talk.uk-yankee.com/index.php?board=11.0

Last edited by nun; Aug 31st 2012 at 2:19 pm.
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Old Aug 31st 2012, 3:34 pm
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Default Re: UK Mortgage Endowment Policy and US Tax

Thanks for all these replies. As far as I am aware, there are no taxes outstanding other than whatever is due for the endowment. The proceeds of the house were declared on my US tax form back in 2001 and so it's just the endowment that's the issue.

The question is - where on the US tax return does it go? Jerseygirl - if you put it in your return last year can you tell me which form it went on?
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Old Aug 31st 2012, 3:57 pm
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Default Re: UK Mortgage Endowment Policy and US Tax

Originally Posted by beerandtabs View Post
Thanks for all these replies. As far as I am aware, there are no taxes outstanding other than whatever is due for the endowment. The proceeds of the house were declared on my US tax form back in 2001 and so it's just the endowment that's the issue.

The question is - where on the US tax return does it go? Jerseygirl - if you put it in your return last year can you tell me which form it went on?
I'll find out and let you know later...maybe tomorrow.
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Old Aug 31st 2012, 4:10 pm
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Default Re: UK Mortgage Endowment Policy and US Tax

Thanks - that would be really helpful.
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Old Aug 31st 2012, 4:29 pm
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Default Re: UK Mortgage Endowment Policy and US Tax

One way would be to put the difference between the premiums paid and the payout on 1040 Line 21. You'd probably want to file 1116 to account for any UK tax withheld.

However, I've very dubious as to whether that's the right thing to do. There seems to be an assumption that the tax deferred status of the UK endowment policy somehow makes it tax deferred for US taxes and you only have to deal with it on US taxes at payout. There are certainly foreign insurance products that have US tax deferred status, but I would tend to believe that a UK endowment policy does not as it was not specifically designed to do so. It reminds me of the situation with UK ISAs, tax free in the UK, not tax free in the USA. If this is the case then foreign trust filing is also probably required. Certainly FBAR is required.

Last edited by nun; Aug 31st 2012 at 4:31 pm.
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Old Aug 31st 2012, 4:46 pm
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Default Re: UK Mortgage Endowment Policy and US Tax

As so often seems to be the case with the IRS, trying to do the right thing just seems to get more and more complicated. If someone has filed a return based on a specific approach and the IRS has not objected I think I'll have to go with that and hope for the best.

FUBAR is a separate issue. Presumably anyone with an endowment policy would have had to be making a filing for it since they first introduced FBAR (ten years ago?). I doubt that many people would have realized that was the case.
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Old Aug 31st 2012, 5:07 pm
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Default Re: UK Mortgage Endowment Policy and US Tax

Originally Posted by beerandtabs View Post
As so often seems to be the case with the IRS, trying to do the right thing just seems to get more and more complicated. If someone has filed a return based on a specific approach and the IRS has not objected I think I'll have to go with that and hope for the best.
I can feel your frustration. Declaring the policy payout as income on the 1040 is something. As I said I don't know if it's the correct thing to do, but it might be....and then again the strictly correct thing might be to file 1040x etc etc.

FUBAR is a separate issue. Presumably anyone with an endowment policy would have had to be making a filing for it since they first introduced FBAR (ten years ago?). I doubt that many people would have realized that was the case.
FBAR has been around since 1970, but what we know and love today was produced by amendments made in 2004. But to the IRS ignorance is no excuse.
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Old Aug 31st 2012, 5:14 pm
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Default Re: UK Mortgage Endowment Policy and US Tax

Yes, I love the ignorance is no excuse thing. If I had time to dedicate to studying everything the IRS produces instead of trying to earn a living, keep the family together, make the car payments, stop the house falling apart around us, etc., etc., etc. I'm sure I'd be just as up to date on it all as the IRS staff are.

Design a system that's so complex as to be beyond human ability to comprehend and then punish people because they were ignorant. Not even the accounting professions who do study it can agree on half of it. Great system. Perhaps we'll all end up in jail and then there'll be no-one to pay any taxes anyway.
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Old Aug 31st 2012, 5:23 pm
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Default Re: UK Mortgage Endowment Policy and US Tax

I'm following the conversation with interest, as I have an endowment policy due to mature in 2018. If I understand correctly, there are two concerns:
  • One is the annual return amount added to the policy - does it go in your annual return.
  • The other is the final payout amount.
I'm pretty sure that although I told my tax adviser about my policy, the annual return wasn't included in the return for 2011. The annual return is pretty pathetic anyway, about 0.1%. Pretty sure I included the whole policy on my FBAR.

Regarding how much tax would be due on final payout, I'm interested on whether the US taxable "gain" is calculated on:
  • Amount over the paid premiums (for me, 20,916)
  • Amount over the "guaranteed" payout figure ion maturity (about 23,000 at the moment)
  • Amount over the "life insurance" sum assured (45,000)
It's a long way away for me, and no guarantee I'll still be living in the US then, but interested to know nonetheless. Thank goodness I converted my mortgage to Repayment sometime last century. Just using it as a life insurance policy now.....
Originally Posted by beerandtabs View Post
Yes, I love the ignorance is no excuse thing.
And it's confusing enough for the locals. A colleague of mine cynically reckons it's deliberately designed so that no-one can ever be sure you don't owe the IRS money. Once you start adding these questions about financial products designed for another country's tax system, it's a nightmare!
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Old Aug 31st 2012, 5:26 pm
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Default Re: UK Mortgage Endowment Policy and US Tax

Originally Posted by nun View Post
One way would be to put the difference between the premiums paid and the payout on 1040 Line 21. You'd probably want to file 1116 to account for any UK tax withheld.

However, I've very dubious as to whether that's the right thing to do. There seems to be an assumption that the tax deferred status of the UK endowment policy somehow makes it tax deferred for US taxes and you only have to deal with it on US taxes at payout. There are certainly foreign insurance products that have US tax deferred status, but I would tend to believe that a UK endowment policy does not as it was not specifically designed to do so. It reminds me of the situation with UK ISAs, tax free in the UK, not tax free in the USA. If this is the case then foreign trust filing is also probably required. Certainly FBAR is required.
Would not the way to avoid or minimize potential future hassle be to go with the worst case scenario?

Presumably, if you take the annual approach, then only the earnings from the years while under US tax rules will apply? In my case that would be only a couple of years.

Taking the basic 'payout minus premiums' approach would, in such a case, provide a greater tax liability, i.e. if anything would favor the IRS.

In my case I'm going to go with the latter approach, as it plays safe. As it happens the amounts involved are so small anyway that it really will make no significant difference to my tax bill so it isn't worth sweating over.

I know...there's no right answer!
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