Lobler was whacked with a huge tax bill of $560,000 (£390,418, €495,000) on the $1.42m he withdrew the “wrong way” from an offshore bond.
In April, HMRC published a consultation paper on changes to the rules for withdrawing from life policies, in a bid to tackle the massive tax bills some policyholders may face if they take out money in the “wrong way”.
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.
Lobler case
However, in some cases, taking more than 5% in part surrender can result in a significant tax bill for a policyholders, although HMRC predicted that this would only apply to 600 UK policyholders.
In 2007, Joost Lobler was ordered to pay $560,000 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.
HMRC rules out 5% changes
Having consulted with the international life insurance industry until the end of July, the rule changes were expected to be announced in early October.
In early November, Canada Life International’s technical manager Neil Jones revealed he expects the UK to either pick the 100% allowance option or leave the rules as they are but allow for providers to correct case where a ‘mistaken’ withdrawal leads to a huge tax bill.
It turns out he was right and after much speculation, later that month in the Autumn Statement, HMRC confirmed it was opting to keep the current 5% tax free allowance on offshore bonds.
Instead, the tax office will allow policyholders to correct ‘unfair’ tax bills resulting from ‘mistaken’ withdrawals of life policies.
Rachael Griffin, head of product law and financial planning at Old Mutual, told International Adviser that industry is now waiting on guidance notes on how the retribution process will work and expects this to be released “sometime in January”.
