A heartfelt appeal
Lobler contested the situation arguing the unfairness of the tax charges amounting to $1.3m. He took his case to the First-Tier Tribunal, which originally declined the appeal but in the final assessment it commented on the absurdness of the tax charge and said: “With heavy hearts, we dismiss the appeal.”
However, it was felt there were grounds for appeal to the Upper Tribunal. The points considered as part of the appeal process were as follows: private law grounds, including doctrine of mistake at common law, the doctrine of mistake in equity and the remedy of rectification; human rights grounds in private law; public law grounds, including jurisdiction of the First-Tier Tribunal and alleged ultra vires acts by HMRC.
The appeal at the Upper Tribunal was allowed on the grounds of rectification alone. All other arguments based on public law, effectively the legislation itself, and human rights were dismissed. The appeal took place in March 2015. One comment from the Upper Tribunal gets to the heart of the issue: “There is no doubt that Mr Lobler would not have instructed [the insurer] in terms of a partial withdrawal had he known about the devastating tax consequences of his choice of withdrawal method.
“It is common sense that nobody would willingly contract to pay an amount of tax that would effectively lead to his own bankruptcy if there were a choice not to do so and achieve the same goal. It is therefore clear to me that the mistake made by Mr Lobler is of a sufficiently serious nature.”
Common sense prevails
The Lobler case came at a time when there was a lot of media and political comment about the perceived unfairness of the UK tax system. Clearly, the outcome of the case was in line with common sense but the case further outlined the danger of the partial surrender rule if adequate advice was not taken.
Following lengthy discussions with the life industry, HMRC issued a consultation in April 2016. HMRC’s aim was to stop similar situations occurring with limited cost to the sector. The remedies suggested in the paper were as follows:
l Tax the economic gain. This option would keep the 5% entitlement but any excess would be taxed in line with the actual growth within the policy, similar to a UK capital gains type calculation and the tax system often used in continental Europe.
l Introduce a 100% allowance. A policyholder would be able to take up to 100% of the premium paid as partial surrender before any charge to tax was made.
l Deferral of excess gains. This sought to cap the amount of excess that could be brought into charge each year, limiting the excess event that could occur at one time.
It was pointed out that some of the options were overly complicated and that all the options would require changes to life company systems and processes that would incur significant costs and additional training.
Radically changing the legislation was perceived as potentially throwing out the baby with the bathwater. It was also felt any changes would result in yet more uncertainty in a sector still dealing with the outcome of RDR and a raft of other regulations.
It was also pointed out the Association of British Insurers had produced a best practice paper on partial surrenders for insurers and most, including those in the Isle of Man with UK parents, were adopting this.
continued on the next page
