scrubbedexpat099

I doubt it would, it would no longer be relevant.

One of the problems.

lansbury

I was referring to what I recalled on a previous one. The one paying out in November is from the same company, so I'm hoping the information will be on the statement then.

nun

As with most foreign accounts IRS taxation is complex and open to interpretation, but there are some definite conclusions regarding UK endowment policies.

1) They count as FBAR accounts and must be included in your annual FBAR calculations.

2) Any interest and gains (or losses) must be included annually on your 1040. The interest and gains are not tax deferred. How they are to be taxed depends on the policy's investments. It will probably be difficult to get any information from the UK policy administrators as they have no reason to comply with US taxation requirements.

3) If the policy is invested in a PFIC that would require annual PFIC 8621 filing.

4) Any lump sum payment must be included on your 1040, whether that would be income or PFIC gains I don't know.

The final conclusion is that UK endowment policies are probably best avoided by US residents and citizens because of the potential for PFIC exposure and the associated tax complications. It is sad to say, but the requirement for FBAR filing will probably continue to produce complications, uncertainty and fear in those holding foreign accounts way out of proportion to the value of those accounts.

JAJ

Correct, they're best avoided by U.S. residents/citizens. But someone who has one can't turn the clock back so has to think about what is the best and most pragmatic way to move forward. That should usually be to cash in the policy and pay tax on the terminal gain (if any - endowments have not been shown to be good investments). As to prior years, in an individual year any gain/loss is probably going to be small and anything more than a few years ago is outside the statute of limitations.

That's probably a lot better than being overwhelmed by all the complexity (which even tax experts don't understand) and doing nothing at all.

nun

Yes I agree, for simpler taxes endowment policies should be sold. The question of how to deal with previous years of ownership is difficult. The strictly correct way is nasty to contemplate, but if you ignore those years and then file an FBAR when you sell the endowment will the IRS ask questions? I really don't know. If there is little or no tax due then even if the IRS did investigate the fine for that would also be little to nothing, the bigger trouble would be FBAR and PFIC fines and fees, and then we get into the VDP or not debate and roulette wheel. Something to take away from all this is that regular UK financial accounts can be the cause of significant worry for US residents, so it is best to do careful planning before a move to the US. Of course that's of little help to people that already own such investments.

scrubbedexpat099

VDP?

JAJ

I have never heard of a case (outside the voluntary disclosure program, which is well documented) where someone who has paid their taxes has been fined for non-filing of FBAR. As for PFICs etc, I doubt the IRS has many employees who are trained in this level of complexity and would they work on cases where the sums are small?

When faced with overwhelming complexity one has to consider taking a reasonable approach. And treating the gain on an endowment the same as if it was from a U.S. endowment would be treated is not an unreasonable approach to take. Especially as there appears to be no specific IRS or court ruling suggesting a different treatment for a foreign endowment. So while they could ask questions - realistically would they, and even if they did, would they challenge a position that gives them a tax gain in 2012? Such an approach may well give the IRS more tax than a more complicated calculation would lead to, but avoids needing to amend prior year tax returns.

Unfortunately there are no easy answers but a simple/reasonable approach to compliance, may, even if not strictly "correct" be the better option. Compared to doing nothing at all. Should be discussed with a competent CPA, etc, but the simple approach should normally be the default and if anything else is contemplated, one should understand why.

nun

You make good points, but I would say that it's pretty obvious that a UK endowment policy is a foreign account so to treat it like a US endowment is simply wrong. How it should be taxed depends entirely on how the endowment is invested. Whether the IRS will see that or bother about it, I do not know. Every situation will be different and each tax payer has to weigh their options. I do not know of any FBAR fines outside of VDP either, but that doesn't mean that there aren't any, or that there won't be any in the future.

FBAR is definitely required, so do you or don't you file? The UK endowment is a foreign account, so do you treat it like a US endowment which is simple and hopefully won't be detected and if it is the fines should be small or do you open the Pandora's box of taxing it as a foreign investment account?

At least we now have a better picture of the options and people can make a more informed decision, but things haven't become any easier than when the thread started.

oh VDP = Voluntary Disclosure Program.