Chargeable Events - Bonds - Investments - Knowledge Direct


Don’t be rash; get tax advice before you encash!

The Upper Tribunal ruling in Joost Lobler v HMRC (2015) UKUT 152 (26 March 2015) has overturned the First Tier Tribunal decision and now enables the court to provide a remedy of rectification in the limited circumstances where the court deems the error of selecting a part surrender instead of a full surrender on a withdrawal form to be ‘of a sufficiently serious nature’.

The particular facts of the case were that, during 2005, Mr Lobler invested his life savings of £350,000 together with a bank loan of another $700,000 into life insurance policies with Zurich. He then withdrew $746,485 on 28 February 2007 by part surrender to repay the loan and a further $690,171 on 29 February 2008 by part surrender to buy a home.

The result of the part surrenders was a tax bill of $560,000 which exhausted his life savings and could even have bankrupted him, even though the life assurance policy made no substantial profit.

The court followed the ruling in Pitt v Holt[2011] EWCA 197 and stated:

“that a mistake as to the tax consequences of a transaction may, in an appropriate case, be sufficiently serious to warrant rescission and thus rectification.”

“There is no doubt that Mr Lobler would not have instructed Zurich in terms of a partial withdrawal had he known about the devastating tax consequences of his choice of withdrawal method. It is common sense that nobody would willingly contract to pay an amount of tax that would effectively lead to his own bankruptcy if there were a choice not to do so and achieve the same goal. It is therefore clear to me that the mistake made by Mr Lobler is of a sufficiently serious nature within the Pitt v Holt test.”

The remedy of rectification provided by the court allowed the withdrawal to be taxed as a full surrender of individual policies rather than a part surrender across all policies; thereby, reducing Mr Lobler’s tax liability significantly.

The court agreed that each party would pay its own costs. 
The decision in Joost Lobler v HMRC opens the door to allow taxpayers to correct errors made in the selection of the withdrawal method for an investment bond (either onshore or offshore).

However, whether the court will grant the remedy of rectification will depend on the specific facts of each case. The potential court costs to confirm whether rectification will be granted need to be considered against the tax liability to ensure they do not outweigh the potential tax saving.

With appropriate financial advice this could be avoided and therefore we strongly recommend taxpayers seek advice before selecting their withdrawal method. Our withdrawal form contains this recommendation.

The court agreed that whether or not HMRC acted unlawfully by refusing to amend Mr Lobler’s return was a matter for judicial review rather than the appeal court.

The Chartered Institute of Taxation is intending to make a formal submission to HMRC and the Treasury to request a change in the law.

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