A 1% excise tax, a quarterly return, and a trust nobody meant to create

A federal charge on premiums paid to insurers outside the United States. It applies to the premium rather than to any payout, and it falls due quarterly. Form 720 is the return that carries it.

Whoever pays the premium. The instructions to Form 720 state that the person who pays the premium to the foreign insurer, or to any nonresident person such as a foreign broker, must pay the tax and file the return.

The instructions go further. Failing that, any person who issued or sold the policy, or who is insured under it, is required to pay and file.

So the obligation follows the money and then, if necessary, the policy. An American insured under a British policy cannot assume it is somebody else's problem.

One percent on life insurance and annuity premiums, with the rates set out on the form itself, so an annual premium of £2,000 produces about £20 of tax. However, Form 720 is a quarterly return, so that single payment still lands in one specific quarter with its own deadline.

The frequency is what surprises people. Form 720 is a quarterly return, so a single annual premium still lands in one specific quarter with its own deadline.

Small tax, disproportionate administration. That combination is why the charge is so often missed entirely.

It can, and the treaty covers this tax expressly. The taxes-covered article of the US-UK treaty lists the federal excise taxes imposed on insurance policies issued by foreign insurers among the taxes it applies to, which is unusual for an income tax treaty.

That is unusual. Most of the treaty deals with income tax, and this is not an income tax at all.

Claiming the benefit is not silent, though. The Form 720 instructions require insurers and reinsurers taking a treaty position to disclose it annually, reporting the exempt premiums.

In practice the insurer's own status drives the answer, so ask the insurer whether it treats premiums from US persons as treaty-exempt.

Because a trust is a trust, and the trustees are British. Consequently the arrangement falls into the foreign trust category for American purposes, with the reporting that follows. Whether reporting actually applies then depends on who is treated as owning it and who receives from it.

Whether reporting actually applies depends on who is treated as owning the trust and who receives from it.

An American who set up the trust and pays the premiums is the obvious candidate for ownership treatment.

Our article on Form 3520 and foreign gifts sets out the neighbouring reporting most families meet first.

Generally not, as income. Publication 525 sets out the ordinary position that life insurance proceeds paid by reason of the insured's death are not included in income. That rule assumes the contract qualifies as life insurance under the American statutory definition rather than the policy's own label.

That rule assumes the contract is life insurance for American purposes, which uses a statutory definition rather than the label on the policy.

Most straightforward term assurance looks like life insurance under either system. Investment-linked policies are where the question gets real.

Where a policy might not qualify, the consequence is annual taxation of the growth inside it rather than a tax-free payout.

These need individual advice, and we will not generalise about them here. A UK investment bond is a life policy in form and an investment product in substance, which is exactly the fact pattern the American definition tests.

Britain taxes those products on its own basis, with chargeable event gains and top-slicing relief.

Neither system's treatment predicts the other's. Where a policy has an investment element, get it reviewed before you buy rather than at maturity.

On the British side, yes, and that is the point of the arrangement. A policy written in trust pays to the trustees rather than into the estate, so it is not reduced by inheritance tax on the way to the family.

HMRC's guidance on trusts and Inheritance Tax sets out how the regime treats trusts more generally.

The American consequences do not undo that benefit. They sit alongside it as extra cost and extra paperwork.

So the planning usually survives the analysis. It just needs pricing honestly, including the filings.

The source of the money does not change who pays the premium for these purposes, so an American paying from a British current account remains the person paying it. What the account does affect is your other reporting, because its balance feeds the FBAR threshold alongside everything else.

What the account does affect is your other reporting, because balances feed the FBAR threshold.

Our comparison of Form 8938 and the FBAR covers those separate obligations.

It matters a great deal. Where a non-US spouse owns the policy and pays the premiums from their own funds, the American exposure narrows considerably. That is not artificial planning but a question of whose policy it actually is, and it is best settled at the outset.

That is not artificial planning; it is a question of whose policy it actually is.

Decide it at the outset, because changing ownership later can itself be a reportable event.

In our practice this single question resolves more of these cases than any treaty argument.

Employer-provided death in service cover rarely raises the premium charge for the employee, because the employer pays the premium.

The British side has its own treatment, and cover written under a registered scheme sits differently from a standalone policy.

Check whether a lump sum would pay into a trust and who the beneficiaries are. That is where an American employee's reporting question can reappear.

The trustees receive the money and then decide what to do with it. For a beneficiary who is American, a payment from the trust is a distribution from a foreign trust.

So the payout can be free of income tax and still reportable when it passes on.

That sequence catches families at the worst possible moment, which is a reason to map it in advance.

Our article on UK inheritance tax for Americans covers the estate side of the same planning.

Usually yes, because it is still life insurance issued by a foreign insurer. Lenders often arrange cover alongside a mortgage, and the premium may be collected with the monthly payment.

Consequently the premium charge can apply to a policy you barely think of as insurance.

Check the paperwork rather than the direct debit description. Where the insurer sits outside the United States, the same questions arise as for a standalone policy.

These are not life insurance, though they are often sold alongside it in the same conversation. The excise tax provisions distinguish between categories of insurance, and the rates on the form differ accordingly.

Additionally, a payout under a health or disability policy raises its own income question, which is separate from the life cover analysis.

So a combined policy may need splitting between its elements. Ask the insurer for a premium breakdown, since one rarely appears on the schedule.

In our practice bundled protection products are the hardest to analyse and the most commonly sold.

Three things, kept together in one folder. The policy schedule showing the insurer and the country it sits in, the annual premium statements, and any correspondence about treaty treatment. Add the trust deed to them where a trust is involved, since the deed answers the reporting question.

Furthermore, keep the trust deed with them if a trust is involved. The deed decides the reporting question that the policy paperwork cannot answer.

Typically that folder is thin and it answers everything. Rebuilding it a decade later, after an insurer has merged, is considerably harder.

Four questions settle this: who owns the policy, who pays the premiums, where the insurer sits, and whether a trust holds it.

Answer those and the filing list falls out. The tax is small. The admin is not.

Do it before the first premium. It is much harder later.

Work through this before signing the application, not after the first premium.

Take an illustrative arrangement. An American in Bath takes out £500,000 of term assurance with a UK insurer, premiums of £900 a year, written in trust for her children.

The premium charge, if it applies, is around £9 a year. The quarterly return that carries it is the real cost, along with establishing whether she is treated as owning the trust.

The death benefit itself should not be taxable income. The figures are illustrative; the imbalance between a trivial tax and substantial administration is the point.

First, assuming a small excise tax means no filing. The return is quarterly whatever the amount.

Second, treating a treaty exemption as automatic rather than as a position to establish. Third, overlooking the trust entirely because it holds only a policy.

Fourth, buying an investment-linked policy on British advice alone. Fifth, discovering the beneficiary reporting only when a claim is paid.

We look at four things: who owns the policy, who pays, whether the insurer claims treaty treatment, and whether a trust brings reporting. Those answers decide whether this is a footnote or a project.

Our US federal return service covers the excise return and any trust forms alongside the annual filing, so nothing sits in a gap between advisers.

Send us the policy schedule and the trust deed and we will tell you what actually applies.