In a summary on tax changes, published shortly after the chancellor Philip Hammond’s Autumn Statement on Wednesday, the UK Treasury said: “As announced at Budget 2016 and following consultation, the government will legislate in Finance Bill 2017 regarding the disproportionate tax charges that arise in certain circumstances from life assurance policy part-surrenders and part assignments.
“This will allow applications to be made to HMRC to have the charge recalculated on a just and reasonable basis. This will lead to fairer outcomes for policy holders.”
The details of the retribution procedure will be announced on 5 December when the Finance Bill is unveiled, with changes being implemented from April 2017.
Lobler case
Currently, using part surrender, policyholders of offshore bonds can take out 5% of the money they have invested tax free every year over the lifetime of the bond, or with part assignment they can sell up to 5% of the policy every year, again tax free.
Earlier this year, HMRC published a consultation paper to overhaul of rules governing the part surrender and part assignment of life insurance policies after the 2007 Lobler case where Dutch national Joost Lobler was ordered to pay $560,000 (£390,418, €495,000) in tax on the $1.42m he withdrew from a policy he set up with Zurich Life just two years earlier.
Lobler took his case court and eventually won
As a result, the tax office set out three proposals, of which only one would be implemented, including taxing the economic gain; deferring any excessive gains; or introducing a 100% allowance to replace the current annual 5% tax free withdrawal.
However, the UK tax office has now ruled out a new system for calculating gains, after feedback from the international life industry, including key figures such as Canada Life’s Neil Jones and Old Mutual’s Rachael Griffin, deemed the proposals too complex and unnecessary.
‘Pragmatic approach’
Griffin, head of product law and financial planning at Old Mutual, described the decision as a “pragmatic approach”, given that HMRC has previously stated that just 600 UK policyholders are at risk of facing hefty tax liabilities seen in the Lobler case.
“The government has confirmed that, from 6 April 2017, it will allow HMRC to correct the inequitable tax position which can arise when someone withdraws money from their life policy (bond) in the wrong way,” said Griffin.
“HMRC will correct the case on a ‘just and reasonable basis’. The number of customers taking withdrawals from bonds in the wrong way is minimal so this feels like a pragmatic approach, and will allow for corrections to be made without impacting the general withdrawal rules on bonds for all other customers.”
Concerns
Griffin raised concerns over how policyholders will be notified over such corrections, adding that the process could lead to confusion.
“My only reservation is around how the correction will be reflected in all future correspondence with the policyholder, and could lead to confusion,” she said.
She has previously called for HMRC to implement a case-by-case rectification process for withdrawals, where providers can work on behalf of policyholders to correct cases where a ‘mistaken’ withdrawal leads to a massive tax bill.
