The tribunal judge ruled that Dutch national Joost Lobler could appeal a decision by the tax regulator which made him liable for a tax charge of $560,000 (£382,407) on investment bonds held with Zurich, which he withdrew in large lump sum ‘partial surrenders’. He had a realised taxable income of some $1.3m (£890,000).
Having misunderstood the tax position he failed to refer to the amounts in self-assessment returns. The tax bill treated the amounts as standard income and represented an effective rate of 779 per cent on actual income generated, the judge said.
Jonathan Davey, general counsel to HMRC, fought the application to appeal the decision and described Mr Lobler as “careless” in not taking advice “as to the tax consequences of his choice”.
However, stating that the “legislation is not at all intuitive and no reasonable man would have expected the outcome”, the judge has given Mr Lobler leave to appeal. Had he simply sold the policies, he would have faced a much smaller chargeable gain tax charge.
The case is significant in the context of new rules in place since Monday, which give individuals over the age 55 the right to access their pension. There have been warnings those not taking advice could be hit with sizable tax charges, as lump sums will similarly be treated as income.
Insurers and providers have been tasked with providing a ‘second line of defence’ to those in this situation, to ensure that even those who have not taken advice are aware of what the pitfalls are of using the new pension freedoms.
Mr Lobler invested in a number of investment bonds with Zurich which amounted to around $1.4m (£960,000) in 2006. He then withdrew 97.5 per cent of the amount he had originally put in by way of ‘partial surrenders’ in two separate transactions.
Mr Lobler did not refer to these amounts on his self-assessment tax returns in 2007 and 2008 as he believed he did not need to with ‘withdrawals of capital’.
Zurich informed him of a ‘chargeable event gain’ of $676,184 (£461,142) in relation to the 2007 withdrawal and of $619,871 (£422,985) in relation to the 2008 withdrawal. Zurich also informed HMRC, as it was obliged to do.
In her decision, the judge stated: “Mr Davey pressed on me that Mr Lobler could and should have taken advice as to the best means of withdrawals from the policies. The true analysis of the matter is only that Mr Lobler now wishes that he had not done what he did.
“One does not seek advice on everything, the legislation is not at all intuitive and no reasonable man would have expected the outcome.”
If he had sold the policies, Mr Lobler would have ended up with little or no tax charge, Old Mutual Wealth’s financial planning expert Rachael Griffin told FTAdviser. “The judge has given the go-ahead to appeal the decision to the higher court, it would have been a much smaller tax charge or no tax charge if he had sold the policies.
“This particular case is quite serious as he would be effectively bankrupt after paying the tax liability. I think that Mr Lobler not taking advice weighed heavily on the courts. He made the decision as he did not know the difference between what he was doing.”
When asked whether in this case Zurich should have flagged up to Mr Lobler the potential tax liabilities of partially surrendering his policies, Ms Griffith said “most insurers would have followed the same approach”.
She added: “We recommend people receive advice before they make a decision [such as a withdrawal] as the language used is technical and an adviser can explain that.”
donia.o’loughlin@ft.com
