In the recent case of Joost Lobler v HMRC (TC2539) the taxpayer was Dutch and had sold property in Holland after moving to live in the UK. He invested roughly $1.4m of the proceeds in a number of Zurich life insurance policies arranged through HSBC Private Banking.
Without taking financial advice, over the course of the next two years Mr Lobler withdrew the funds invested in order to buy a UK property, leaving the policies with comparatively negligible value.
The taxpayer opted for partial surrender out of the 4 options available when completing the form to make a withdrawal. He did not mention the withdrawals from the policy on his tax returns for 2006/07 and 2007/08 as he assumed that no taxable gain had arisen, having not withdrawn more than he had paid into the policies.
Unfortunately, technically he was wrong, and because of the options he chose Zurich carried out their legal obligation to inform HMRC of the withdrawals, which led HMRC to determine that tax was due and assessed the taxpayer to $560,000 under ITTOIA 205 s.461.
The taxpayer appealed saying that a mistake had been made when filling in the surrender forms. Had he made a full surrender no tax would have been due and he did not realise the consequences of making a partial surrender claim.
The first tier tribunal dismissed the taxpayer’s appeal on the grounds that they could not find a different way to interpret the legislation. It was suggested that the taxpayer’s situation was “outrageously unfair” as he had made no profit or gain, but had become liable to tax which could potentially bankrupt him.
The moral of the story is of course that tax is complex and it is prudent to take professional advice. Anyone drawing a comparison between HMRC’s aggressive use of obscure legislation to their own financial advantage and those indulging in “tax avoidance” must of course be mistaken.