Who pays the excise tax when a UK life insurer has no US office?

Where the UK insurer has no US office, agent, or place of business, liability generally falls on the person who pays the premium directly to the foreign insurer. If that payor does not remit the tax, the IRS can look to the policy issuer, the seller of the policy, or the insured person instead, so the US policyholder is often the party responsible for filing Form 720.

How is the treaty exemption from the excise tax claimed?

The exemption depends on the foreign insurer holding a closing agreement with the IRS under Revenue Procedure 2003-78, confirming that its premiums qualify under the relevant income tax treaty. A premium payor can only rely on the exemption if they have knowledge the closing agreement was in force for that taxable period, and the exempt position is disclosed on the first-quarter Form 720 due before 1 May each year.

When is Form 720 due for the foreign insurance excise tax?

Form 720 is a quarterly return, due by the last day of the month following the end of each calendar quarter in which a taxable premium was paid. Because the foreign insurance tax sits in Part II of the form, it is not generally subject to the semimonthly deposit rules that apply to many other excise taxes, so payment typically accompanies the quarterly return itself.

Does a treaty-exempt UK life assurance policy still need Form 8938 reporting?

Yes. The section 4371 excise tax position and Form 8938 asset reporting are separate obligations. Even where the closing agreement of the UK insurer fully exempts the premiums from excise tax, the cash value of the policy is still a specified foreign financial asset, and a US person who meets the applicable Form 8938 threshold must disclose that value with their federal income tax return.

What happens if a filer never filed Form 720 for past UK premiums?

Unfiled quarters carry failure-to-file and failure-to-pay additions plus interest on any excise tax due, applied separately to each quarter in which a premium was paid. Because Form 720 is filed quarterly, several years of premiums can mean many outstanding returns. Reviewing each premium payment date, confirming the closing agreement status of the insurer for each year, and filing the outstanding returns brings the position current.

Form 720 Excise Tax Foreign Life Insurance Guide

Q: What is the Form 720 excise tax on foreign life insurance?

The Form 720 excise tax foreign life insurance rules require a US person paying premiums to a foreign insurer to remit a federal excise tax under Internal Revenue Code section 4371, generally at 1 per cent of the premium for life insurance and annuity contracts. The tax is reported quarterly on Form 720 unless a valid treaty exemption applies to that specific insurer for that year.

The Form 720 excise tax foreign life insurance rules require a US person who pays premiums to a non-US life assurance or annuity provider to self-assess and remit a federal excise tax under Internal Revenue Code section 4371, then report and pay it quarterly on Form 720, Quarterly Federal Excise Tax Return, unless a US income tax treaty exemption applies and is properly evidenced. For a high-net-worth American resident in the UK who holds a UK life assurance or annuity contract, this obligation sits alongside, not instead of, separate reporting of the cash value of the policy on Form 8938. This article sets out who is liable, how the quarterly Form 720 mechanics work, how the treaty exemption is claimed and evidenced, and why a policy that is fully exempt from the excise tax can still trigger Form 8938 reporting.

What is the Form 720 excise tax on foreign life insurance, and who pays?

Section 4371 of the Internal Revenue Code imposes a federal excise tax on premiums paid to a foreign insurer or foreign reinsurer that is not subject to US income tax on those premiums. The tax reaches premiums paid on life insurance, sickness and accident insurance, and annuity contracts, as well as casualty insurance and indemnity bonds, whenever the risk insured is a US risk, including the life or health of a US person. A UK life assurance or annuity contract purchased by an American living in the UK from a company that is not a US insurer generally falls within this rule, because the underlying risk is that of a US insured. The tax is reported using Form 720, Quarterly Federal Excise Tax Return, under the foreign insurance tax line, identified on the form by IRS Number 30.

How the excise tax rate applies to life assurance and annuity premiums

Under section 4371, the rate that applies depends on the type of contract. Life insurance, sickness and accident insurance, and annuity contract premiums are generally taxed at 1 per cent of the premium paid, while casualty insurance and indemnity bond premiums are taxed at 4 per cent. Form 720 directs the filer to multiply the premium paid in the quarter by the applicable rate for each category of foreign insurance and to combine the results on the return. For most high-net-worth Americans in the UK, the relevant category is life assurance or an annuity contract, so the 1 per cent rate is the one that typically applies, calculated on the gross premium paid to the foreign insurer during the calendar quarter, not on the cash value or death benefit of the policy.

Who is liable when a UK insurer has no US office or place of business?

Many UK life assurance and annuity providers have no US office, US agent, or US place of business. Where the foreign insurer does not do business in the United States and does not itself file and pay the excise tax, liability shifts to the person on the US side of the transaction. According to the Instructions for Form 720, the person who pays the premium to the foreign insurer, or to a nonresident broker or other intermediary handling the payment, must pay the tax and file the return. Where that payor does not pay the tax, the IRS can look to the policy issuer, the seller of the policy, or the insured person instead. In practice, this means a US person who pays premiums directly to a UK life assurance company is very often the party responsible for self-assessing and remitting the excise tax, because there is no US-based insurer, broker, or agent standing between the policyholder and the foreign insurer.

The person who pays the premium directly to the foreign insurer or to a nonresident broker.
The insurer or reinsurer issuing the foreign policy, if the premium payor does not remit the tax.
Any person who sells a policy knowing it is not exempt from the tax.
The insured person, where no other party in the chain has paid the tax.

Form 720 quarterly filing mechanics and completing IRS Number 30

Form 720 is a quarterly return. A person liable for the section 4371 excise tax must file a return and pay the tax for each calendar quarter in which a taxable premium was paid, with the return and payment due by the last day of the month following the close of that quarter. Unlike many of the taxes reported in Part I of Form 720, the foreign insurance premium tax reported under IRS Number 30 sits in Part II of the form, and the semimonthly deposit regime that applies to many Part I taxes generally does not apply to it, so payment typically accompanies the quarterly return itself. A US person who pays UK life assurance or annuity premiums only once a year, for example at a policy anniversary, still owes the tax for the quarter in which that single payment was made and must file Form 720 for that quarter even though no other excise tax activity occurred in the remaining three quarters of the year.

On Form 720, the foreign insurance excise tax is entered in Part II against IRS Number 30. The filer totals the premiums paid during the quarter for each category of foreign insurance, multiplies each total by the applicable rate, and enters the combined result on the return. The name, address, and employer identification number of the filer must appear on the return, and an individual acting in a personal capacity as the premium payor generally needs an employer identification number to file, since Form 720 is not built around a Social Security number. A cross-border tax preparer familiar with excise filings can confirm the correct identification number format and the correct quarter-by-quarter premium totals before the return is submitted, which matters because Form 720 carries no automatic extension for excise tax payments.

The US-UK tax treaty exemption route

Revenue Procedure 2003-78 sets out how a premium payor may treat premiums paid to a foreign insurer or reinsurer as exempt from the section 4371 excise tax where an income tax treaty between the United States and the country of residence of the insurer contains an excise tax exemption. Because the United States and the United Kingdom are parties to an income tax treaty, premiums paid to a UK-resident life assurance or annuity company can qualify for this exemption, but only where the foreign insurer has taken the additional step of entering into a closing agreement with the IRS establishing that exemption for the taxable period in question. The exemption is not automatic simply because a treaty exists between the two countries; it depends on the specific insurer having a closing agreement in force.

Evidencing the exemption: closing agreements and the annual disclosure

A closing agreement is a binding agreement between the foreign insurer or reinsurer and the IRS Commissioner, established under the procedures in Revenue Procedure 2015-46, that formally confirms the treaty exemption applies to the premiums of that company. Obtaining one requires the foreign insurer to submit the prescribed closing agreement forms, sworn statements, a substantial user fee, and financial evidence such as a letter of credit, and the agreement must be recertified periodically to remain in force. The IRS publishes a list of insurers with closing agreements in place, though the IRS itself cautions that the published list cannot be relied on as conclusive proof that the closing agreement of a particular company is currently valid for the period in question. A premium payor who wants to rely on the exemption should have actual knowledge, before filing, that a closing agreement was in effect for the foreign insurer for that taxable period, and foreign insurers relying on treaty protection must also file an annual statement disclosing exempt premiums, filed together with the first-quarter Form 720 due before 1 May each year.

Illustrative scenario: a high-net-worth American executive in London

This is an illustrative scenario. An American investment banker resident in London pays an annual premium of 40,000 pounds sterling to a UK life assurance company for a whole-of-life policy with an investment-linked cash value. The UK insurer has no US office, no US agent, and does not itself file US excise tax returns. Because the insured is a US person and the UK company has no US presence handling the payment, the banker, as the person paying the premium directly to the foreign insurer, is the party who must self-assess the section 4371 excise tax, file Form 720 for the quarter in which the premium was paid, and remit the tax unless the exemption route applies. If the UK insurer holds a closing agreement with the IRS under the US-UK treaty, the banker may treat the premium as exempt and report the exempt position on the first-quarter Form 720 disclosure, provided the banker has knowledge the closing agreement was in force for that year. If no closing agreement is in place, the 1 per cent rate applies to the full premium paid.

When the treaty exemption does not apply

The exemption fails, and the excise tax becomes due, in several common situations. The UK insurer may never have applied for a closing agreement, so no exemption exists for its premiums regardless of the terms of the treaty. A closing agreement that was in force in an earlier year may have lapsed because the insurer did not complete the periodic recertification the IRS requires. The premium payor may lack the requisite knowledge that a closing agreement was in effect at the time of filing, which the IRS treats as a precondition to relying on the exemption. Finally, some categories of premium, or some structuring of the policy, may fall outside the scope of the treaty article that grants the exemption in the first place. A prudent premium payor confirms the closing agreement status of the insurer for the relevant year before treating a premium as exempt on Form 720, rather than assuming a treaty automatically covers every UK insurer.

Form 8938 reporting of a foreign life assurance policy with cash value

A UK life assurance or annuity contract with a cash surrender value is generally a specified foreign financial asset for Form 8938 purposes, separate and apart from the section 4371 excise tax analysis. A US person required to file Form 8938 with their federal income tax return must report the maximum value of the policy during the year once the applicable reporting threshold is met, and those thresholds are higher for a US person resident abroad than for one living in the United States, and higher again for a married couple filing jointly than for a single filer. The obligation to report the policy on Form 8938 is triggered by ownership of the asset and its value, not by whether excise tax was paid or exempted on the premiums that funded it.

The cash surrender value or account value of the policy as of the last day of the tax year.
Any higher value the policy reached at any point during the year, for the any-time threshold test.
Growth inside the policy, even where no withdrawal or surrender has occurred.

Why a policy can be outside the excise tax but still inside Form 8938

These two obligations test entirely different things. The section 4371 excise tax looks at premiums paid into the policy during a calendar quarter and asks whether an exemption removes that specific payment from tax. Form 8938 looks at the value of the policy itself as an asset held at year end or at its peak during the year and asks whether that value crosses a reporting threshold. A policy can therefore be fully exempt from the excise tax, because the UK insurer holds a valid closing agreement under the treaty, and still require full disclosure on Form 8938 because its cash value exceeds the applicable threshold. Treating the excise tax exemption as if it also excused Form 8938 reporting is a common and costly misreading of two separate regimes that happen to apply to the same underlying contract.

Penalties and compliance risks for missed Form 720 filings

Failing to file Form 720 or failing to pay the section 4371 excise tax when due exposes the premium payor to the standard failure-to-file and failure-to-pay additions that apply to federal excise tax returns, together with interest that accrues on unpaid tax from the original due date. Because Form 720 is a quarterly return, a high-net-worth individual who has paid UK life assurance premiums for several years without filing may have multiple quarters of exposure, one for every quarter in which a premium was paid, rather than a single missed filing. Reviewing the source of every premium payment, confirming whether the UK insurer holds a closing agreement for each year in question, and filing the outstanding Form 720 returns are the practical steps to bring the position current.

Identify every calendar quarter in which a premium was paid to the foreign insurer.
Confirm whether the insurer held a valid closing agreement under the treaty for each of those years.
Calculate the excise tax due, or the exempt position, quarter by quarter.
File the outstanding Form 720 returns and pay any tax and interest due.

How HMRC treats the same policy

The section 4371 excise tax and Form 8938 are entirely US obligations and have no counterpart under the HMRC rules. Separately, HMRC applies its own chargeable event gains regime to non-UK life assurance and investment-linked policies held by a UK resident, taxing gains realised on withdrawal, surrender, or maturity under UK income tax rules published on GOV.UK. A high-net-worth American resident in the UK therefore faces three parallel sets of obligations on a single UK life assurance policy: the US excise tax position on the premiums paid in, the US Form 8938 asset-reporting position on the value of the policy, and the UK chargeable event gains position on any gain the policy produces. None of these three regimes substitutes for either of the others, and each is assessed independently.

Bringing a Form 720 and Form 8938 position up to date

Coordinating the section 4371 excise tax, the quarterly Form 720 return, and Form 8938 asset reporting for a single foreign life assurance policy requires tracking premium payment dates, confirming the closing agreement status of the foreign insurer year by year, and reconciling the value of the policy against the correct Form 8938 threshold for the residence and filing status of the client. For a high-net-worth American holding UK life assurance or annuity contracts, that review runs from the initial premium history through to preparing and filing the quarterly Form 720 return and the annual Form 8938 disclosure alongside the federal income tax return.

The practical takeaway

The Form 720 excise tax foreign life insurance obligation is easy to overlook precisely because the foreign insurer, not the US policyholder, is the party most people expect to deal with the IRS. Where a UK life assurance company has no US presence, that expectation is usually wrong, and the burden of self-assessing the tax, filing the quarterly Form 720 return, and, where available, evidencing a treaty exemption through the closing agreement of the insurer falls on the US person paying the premiums. None of this replaces the separate Form 8938 obligation to report the value of the policy once the applicable threshold is met. Reviewing premium history against both regimes, quarter by quarter and year by year, is the only reliable way to confirm the position is complete.