Neillc37

Does anyone know if there is a withholding tax in the UK on an endowment? My wife has one of these that pays out next year. Payout looks to be about $17k. No other income in the UK as even her bank account is paying no interest. I don't want to spend the money to get her tax code changed if I can help it.

Yes I know about FBAR and 8938. Yes I know how it's taxed in the us. Yes I know it's basis in the US. Yes I know it conforms to IRS rules as a life insurance policy.

Cook_County

Who is it with as I have never seen an endowment that meets the US definition...cool.

nun

Ask your policy provider. If it's a qualifying policy and the administrator has been paying tax annually the lump sum will be UK tax free. I'd be interested to have a definitive answer about the status and taxation of a UK endowment policy in the US.

Neillc37

The policy is with Pheonix Life. I paid to have the policy analyzed by an expert. I have their written statement on it and the IRS accepted my position earlier.
The analysis is just the two tests in sec 7702(a). You only have to pass 1. My plan passes both of them.
I have derived my basis from the payments my wife made. If there have been other tax payments I am not aware of them. I expect to get more details at payout time.
They refuse to answer questions on the plan because we are US citizens. That want nothing to do with us expect paying out the money at the right time and providing a balance.

nun

So has UK tax been paid annually on this policy so that the lump sum is UK tax free? That's usually the case.

Neillc37

I have no reason to think any UK tax has been paid on the account. I would expect a UK life insurance policy to pay no tax until it makes a payment.

quiltman

If the policy qualifies then there is no tax on the lump sum payout - "Peter Chadborn, director at financial adviser group Plan Money explains: If, for example, your policy was taken out after 15 March 1984, the policy term is for at least 10 years, and you have paid the regular premiums for the shorter of either the first 10 years or three-quarters of the term, then you will have met the qualifying rules."

We had one with a mortgage taken out in 1986 which paid out in 2001 , nice little wodge, no tax.

Cook_County

From a UK perspective, there is no tax charged on maturity on a qualifying policy. Moving to the States, a US lawyers opinion is just that; it remains open to the IRS and beyond that the Courts to ask questions and agree on the correct position.

Owen778

I'm afraid that quote is just going to confuse people. It's talking about UK tax on qualified endowment policies. Yes, they are tax free, providing they are qualified. Nun's questions are about that. The question we're mainly discussing is what US taxes are owed by someone who is tax resident in the US.

Oh, and it's helpful to provide a link to quotes like that. The original is here: Will I have to pay tax on my endowment policy? It is maturing soon. | This is Money

Sheepdip

We had two policies mature after we left the UK. No tax in the UK but plenty of it here in the US!

nun

My starting point would be to assume IRS would look through the insurance wrapper and simply tax the underlying investments. So if the UK insurer is paying tax on those each year then the gains would be declared on the US tax return each year and a tax credit taken for the UK tax paid. Whether the investments are PFICs or not and trust issues would complicate the return. This would then make the payout free of both US and UK tax.

If the US tax has not been paid and the US tax basis is simply calculated as the difference between the premiums and the payout then the endowment will have been taxed twice.

Owen778

Now I understand where you're going with this. Unfortunately, my experience is that no information on the underlying investments is provided to endowment holders by the insurer. Admittedly, I didn't take out my own endowment myself, my parents did, but it's never been clear to me what the underlying investments might be, nor how big the costs extracted by the insurer were. Possibly that information was available in basic form, but I never saw it.

Your questions remind me of global360's posts, some way into this thread from last year:
http://britishexpats.com/forum/usa-5...-again-823055/

Neillc37

You guys are talking about stuff I didn't ask. I have had the plan analyzed. We think, under advise from a professional that the plan qualifies as life insurance in the US. An IRS agent got to see this analysis and was satisfied with it.
So I am well withing reasonable bounds to treat the payout as a life insurance payout and deduct the basis calculated by the stream of payments converted to dollars. I will pay ordinary income on the gains in the US.
The tax treaty gives the US the right to tax this and not the UK. This means that if the UK deducts tax I need to get it back as I can't take an FTC on something I wasn't required to pay.
Now our plan won't be qualifying for tax free treatment in the UK as my wife only made 9 years of payments to the plan.
So does the UK have a withholding tax on endowment plans?

nun

I don't know if there is any withholding of tax from a non-qualifying UK endowment policy payout, but any gain will be liable to UK income tax.

Can you point me to the tax treaty Article where the UK cannot tax income from a UK sourced non-qualifying endowment payout?

Neillc37

I am hanging my hat on the annuity section. This hardly matters though. If I am liable for UK tax the US government will pay it through the FTC.
Once again I want to know if there is withholding tax on the UK payment. I tried to avoid all this PFIC, FBAR etc run around up front but people are just way too keen to go on about it.