Investment bond holders could apply to courts to reclaim ‘overpaid’ tax following a tribunal ruling, Rachael Griffin, financial planning expert at Old Mutual Wealth, has said.
In the ruling from the Upper Tribunal in the appeal case of Joost Lobler v HMRC [2015], Judge Mrs Justice Proudman overturned a previous ruling in February 2013, when claimant Joost Lobler had his request to reclaim tax from HMRC rejected.
Mr Lobler had withdrawn 97.5 per cent of his life policies held with Zurich to repay a home loan, which constituted a partial surrender. A chargeable event arose and he was taxed on the amount of gains arising in the tax year. However, under the Income Tax (Trading and Other Income) Act, this set him up for such an enormous tax liability he claimed he was in danger of being made bankrupt.
He had claimed he made a mistake when filling in forms, but the initial tax tribunal said rectification was not available, despite the fact that Zurich was keen to recalculate the tax certificates if HMRC consented.
However, following his appeal, in March this year, Mrs Justice Proudman now ruled that in circumstances the court deems the mistake to be sufficiently serious, they may put the individual in the same position they would have been in had the most efficient surrender method been selected originally.
Ms Griffin said this could set a precedent by which savers who overpaid tax when drawing money from investment bonds could apply to the courts to rectify the way the withdrawal was taken.
This could open up an avenue for many other bondholders to seek to recover ‘overpaid’ tax on withdrawals taken from investment bonds.
She said: “This is a complex area which often presents a challenge for customers. It is not uncommon for customers to process a surrender themselves and inadvertently create an unnecessary tax liability.
How investment bonds work |
Investment bonds are generally issued as a cluster of individual contracts, usually between 100-1000, if the investment bond is a life assurance contract it will pay out a death benefit on death. However, withdrawals can also be taken from the bonds at any time. Up to 5 per cent of the original investment value can be taken tax-deferred each policy year for up to 20 years. Withdrawals of more than 5 per cent can be taken in a policy year but this may be taxable. Source: OMW |
“The Upper Tribunal ruling could make it possible, where circumstances allow, for those individuals to rectify a mistake which has cost them tens of thousands in tax. It is also possible this ruling in the Upper Tribunal could pave the way for a change in the chargeable event legislation.”
Adviser view
Richard Leeson, chief executive of Adviser Advocate, said: “For any adviser who thought that HMRC cracking down on tax planning meant the death of bonds, the courts seem now to be almost sanctioning the best way to avoid tax when using them.”
