Tax & the Partial Surrender of Life Assurance Policies – Joost Lobler
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The decision in the case of Joost Lobler was overturned on appeal to the Upper Tier Tribunal (UTT) in January 2015.
The UTT found in favour of the taxpayer on the grounds of rectification.
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The case of Joost Lobler v HMRC TC02539 demonstrates that taxpayers should always take professional advice before undertaking transactions that may have tax consequences.
The Case of Joost Lobler TC02539
Mr Joost Lobler invested $1.4 million, comprising his life savings and a loan from HSBC, into a life assurance policy.
He subsequently made two partial encashments of the policies in order to repay the HSBC loan and buy a house.
Partial surrenders are taxed based on a deemed gain calculated in reference to the amount withdrawn rather than the actual gain on the policy.
To make matters worse, the policy was a foreign policy which did not receive a deemed credit of basic rate tax at 20%.
Therefore the effect of the partial encashments was that he realised a chargeable even gain of $1.3 million resulting in a UK income tax liability of $560,000 (approx £372,000).
He later surrendered the policies in full, realising a deficiency of $1.23 million. This amount was available for deficiency relief but Mr Lobler has insufficient income against which to set the relief. Unfortunately deficiency relief is not available to carry back, therefore Mr Lobler couldn’t set the deficiency against the earlier gains.
Had Joost Lobler taken professional advice it is likely that he would have been advised to make a full surrender of the sub-policies and would have avoided the tax liabilities arising from the partial surrenders.
The first tier tribunal found that whilst the result was “remarkably unfair” they did not have the power to overturn HMRC’s assessment because the tax was legally due under the law.
Case Study: Mrs M
We recently provided advice to Mrs M, a taxpayer who was in a similar position to Joost Lobler; she had inadvertently created a chargeable gain following a partial surrender despite the fact that the policy had in fact fallen in value.
In this case, the mistake was discovered after the end of the relevant year, however had it come to light earlier, the tax position could have been corrected by making a full surrender before the end of the year.
In the end, our analysis showed that the taxpayer had been non UK resident for part of the policy period and we were therefore able to reduce the taxable liability from £35,000 to £10,000.