The Endowment Policy (UK) US Tax, FBAR, FATCA & PFIC

UK Endowment Policy (UK) US Tax & Reporting

For UK Citizens and residents, there are many different types of investments a Taxpayer can pursue in order to save for retirement and accumulate wealth. For example, Taxpayers may invest in ISAs (Individual Savings Accounts) – which are similar to the United States’ IRA; SIPP (Self-Invested Personal Pension), and various mutual funds or unit trusts. One very common type of investment is the UK Endowment Policy. The Endowment Policy in the UK is an insurance policy, but one of the key components of the investment is that it doubles as an investment vehicle as well. Over the years, endowment policies in the UK have been a bit hit or miss. When the UK person is a US Person (aka dual-US citizen, Lawful Permanent Resident, or meets the Substantial Presence Test in the United States), the endowment policy takes on US Tax implications as well – along with reporting on international information reporting forms such as the FBAR, Form 8938 (FATCA), and Form 8621 (PFIC). Let’s take a brief look at the basics of the United Kingdom Endowment Policy (UK) US Tax, FBAR, FATCA & PFIC.

What is an Endowment Policy (UK)

The endowment policy serves as an investment vehicle with a death benefit. For example, a person would acquire an endowment policy with the idea of receiving a payout when the policy matures. If the person passes away before receiving the payout, then their beneficiaries may receive the benefit instead. Some examples of UK endowment policies include: 

Foreign Mutual Funds in an Endowment Policy

Foreign Mutual Funds within an endowment policy can lead to an unnecessarily complex tax scenario. For example, ownership of Foreign Mutual Funds within the policy could lead to the dreaded PFIC tax situation (Passive Foreign Investment Company) – which results in tax-deferred treatment during the growth phase but then during the distribution time, taxpayers can end up paying double to triple what they would’ve paid if it was a US mutual fund. But, since it is in an insurance policy and not directly owned, other issues will come into play, such as whether or not the person has the ability to select the underlying funds and/or whether they are true mutual funds or mirror funds — the latter which may escape reporting on Form 8621 if it would otherwise be required.

Endowment Policy with Foreign or Domestic Stock, Bond, or US Mutual Fund

In general, whether stocks are US-based or foreign-based, accrued income will be taxed even during the growth phase. That is because the United States does not recognize foreign life insurance policies for tax deferral purposes –and therefore even though the stock and bonds may be wrapped in an endowment policy, they would still presumably be taxable unless the taxpayer was to make a treaty election if they qualify.  

FBAR, FATCA & PFIC Reporting for Endowment Policies

Since technically an endowment policy is considered a foreign financial account, it is reportable on one or more international information reporting forms, such as the FBAR (FinCEN Form 114) and FATCA (Form 8938). The FBAR and Form 8938 or not mutually exclusive from each other — and therefore taxpayers may be required to file the FBAR on both forms. If the foreign investment also contains items such as mutual funds, ETFs, or SICAVs, then the investment may become subject to Passive Foreign Investment Company reporting on form 8621. There are some potential exceptions and exclusions from reporting on 8621, but they are limited.  In addition, the Internal Revenue Service does not require duplicative reporting of the same asset on Form 8938 and Form 8621— although if the taxpayer has multiple types of investments and categories of investments (bank accounts, ISAs, SIPPs, etc.) — both forms may still be required. While the failure to report these accounts may result in significant fines and penalties, the Internal Revenue Service has developed various amnesty programs to assist taxpayers with safely getting into compliance with a reduced penalty, or even a complete penalty waiver.

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