I am a US/UK dual citizen living in the UK. I am married to a UK citizen who does not pay US taxes.
We are buying a property in the UK, and the mortgage lender has sold us "Mortgage Insurance", which pays out a lump sum in the event of one spouse's death, in the amount of the remaining unpaid mortgage. The beneficiary is a UK trust we have set up for the sole purpose of receiving this lump sum and applying it to the mortgage debt.
Additionally, we bought a similar policy that pays out upon permanent disability of either spouse (instead of death).
The lump sum is paid out tax-free in the UK; the theory is that PAYE tax has already been paid on the monthly premiums.
So for the avoidance of doubt let me review the four payout scenarios, all of which result in a lump sum payout for the remaining value of the mortgage:
- I die;
- I become disabled;
- Spouse dies;
- Spouse becomes disabled.
The agent has advised me to check whether any of these four potential lump sum payments would be subject to US tax.
In the worst case, when I die the lump sum would be "income" for me on the year I died, and US tax would have to be paid on the amount (it is potentially 10X what I earn in a typical year).
I would like to know how other UK borrowers subject to US tax have approached this problem. Thanks.