Endowment matured, avoiding US tax liability

bascote

My 25 year endowment is due to mature next month, but I'm advised that, as a US resident, any profit will be liable to federal and state tax, despite it qualifying as tax-exempt in the UK.

The profit is assessed as the difference between the final payout and the cost of premiums over the term.

Does anyone know if I can avoid this tax by not filling in the papers and claiming the pay-out until I'm once again UK resident?

I appreciate that there will be no interest or growth while I'm leaving it dormant, but that's a lot better than paying out hefty US taxes.

kingstreet

This might sound like a daft question, but were you eligible to contribute to a UK qualifying policy if you moved overseas?

On the face of it, you'll need an accountant for this, but your assertion that it is tax-exempt is incorrect, I believe.

During the policy term, your investment has had tax deducted at source from the returns it has made. Provided it met certain conditions, there would be no further liability to a UK higher-rate taxpayer at maturity.

Normally, under the US/UK double taxation agreement , you should not have a further liability, but this needs to be verified. The UK HMRC or US IRS should be able to advise you if you prefer not to employ the services of an accountant.

bascote

I meant tax-exempt in as much as there would be no further tax to pay on maturity for a UK tax payer.

As a US resident, my worldwide income is subject to US tax. The tax treaty doesn't help as there isn't any UK tax to offset the IRS liability. Additionally California doesn't recognize international tax treaties when calculating state tax.

My hope is, that by not withdrawing the matured fund, I would not generate a tax event.

TrickyDicky101

If you did not withdraw, how would the US tax authorities know you had any income to tax?

kingstreet

bascote wrote: »

I meant tax-exempt in as much as there would be no further tax to pay on maturity for a UK tax payer.

As a US resident, my worldwide income is subject to US tax. The tax treaty doesn't help as there isn't any UK tax to offset the IRS liability. Additionally California doesn't recognize international tax treaties when calculating state tax.

My hope is, that by not withdrawing the matured fund, I would not generate a tax event.

You've obviously invested some time into this, more than I, so I can only suggest speaking to the insurer to see what your maturity options might be. I don't know if leaving the money within the plan would somehow prevent your liability to US taxes.

In the UK, policyholders used to be able to leave the money invested in the plan after maturity and take the return from then as a tax-free income, however this changed (IIRC) in 1988.

So you might have two potential issues. The proceeds on maturity and the investment return on the proceeds in future.