In the ruling on a case known as Lobler vs. HMRC, the court decided that if the mistake was sufficiently serious it could put the individual back to the same position they would have been in had the most efficient withdrawal method been selected originally.
“The ruling could make it possible, where circumstances allow, for those individuals to rectify a mistake which has cost them tens of thousands in tax,” said Rachael Griffin, financial planning expert at Old Mutual Wealth.
“It is also possible this ruling in the Upper Tribunal could pave the way for a change in the chargeable event legislation,” she said.
The ruling applies to both onshore and offshore bonds, which are collectively known as investment bonds, and will really only be useful where large sums are involved.
Investment bonds are generally issued as a cluster of individual contracts, and savers can usually withdraw up to 5% of the original investment tax deferred each policy year for up to 20 years, which effectively allows for a return of capital. Withdrawals over 5% can be taken in a policy year but this may be taxable.
The withdrawals can be made in one of two ways: withdrawing across each of the individual policies (part surrender); or selling one or more of the individual policies in order to reach the value of the withdrawal required.
In the Lobler case the saver decided, without taking financial advice, to withdraw his money from his Zurich Life investment bond in two large lump sums using the partial surrender option, incurring a huge tax bill.
“Taking advice ensures individual’s take withdrawals from an investment bond in the most tax efficient manner possible. However, it is not uncommon for customers to process a surrender themselves and inadvertently create an unnecessary tax liability,” said Griffen.
