Client lifeline
What does this decision mean for clients and advisers?
Before 1975, the formula in respect of a partial surrender was based on a calculation that involved ascertaining a deduction for the fractional part of the policy surrendered.
This method proved unsatisfactory because of the requirement for a large number of computations and a valuation of the policy for each computation.
For example, a 10-year policy with monthly part surrenders required 119 successive calculations with 119 successive valuations of the policy surrender value.
The revised regime involves a simpler calculation taken at the end of the year, in which the part surrender is made and does not give rise to tax charges on small part surrenders.
In the vast majority of cases, the part surrender rules operate as intended by Parliament – there are, however, a number of cases where policyholders fall into the tax trap.
For those affected, the tax penalty can be arbitrary and severe.
For those policyholders who are ‘unadvised’, the Lobler decision might offer a lifeline.
Where the policyholder has received advice, the possibility of rectification will be more remote.
Rectification is a discretionary relief – it operates at the discretion of the courts and may well not be granted if an alternative remedy is available.
Where the client is ‘advised’, one available remedy would be to claim on the adviser’s professional indemnity policy.
It is hoped that HMRC will issue further guidance on the practical operation of the part-surrender rules.
The 5% tax-deferred withdrawal facility is a boon for the financial planner and the policyholder.
Introducing further steps into the calculation of the tax charge – as apparently suggested by the Chartered Institute of Taxation – could be seen as self-defeating.
