In Lobler v HMRC  UKUT 0152 a taxpayer ticked the wrong box when withdrawing funds from a life policy with the result was that he was imposed with a 700% tax liability, effectively paying tax on his own capital. The Upper Tribunal allowed his mistake to be rectified.
Joost Lobler came to the UK for work and he invested his capital in several life insurance policies with Zurich Life. He needed to withdraw cash from the policies to do up his house. He did not take any tax advice when he made withdrawals of funds from his policies and had ticked on the life company’s forms for “partial surrender across all policies from specific funds’. He did not realise that there would be tax implications because he did not withdraw anymore than the amount that he had paid in.
HMRC amended Lobler’s tax returns and assessed him for income arising from the withdrawals from the insurance policies, with each withdrawal producing a deemed gain under section 507 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). This produced a tax charge at an effective tax rate of 779% on actual income generated by the policy. If he had ticked a different box on the life company's form and opted for a full surrender of some policies he would only have suffered tax at 40%.
Lobler appealed to the First Tier Tribunal (FTT) on the basis that he made a mistake. The FTT dismissed the appeal with ‘heavy hearts’, stating: ‘A remarkably unfair result arises as a result of a combination of prescriptive legislation and Mr Lobler’s ill-advised actions'.
He then appealed to the UT. It found that Lobler had made a serious mistake relating to the law. He did not take advice before withdrawing funds from his policy however his actions were not those of carelessness because "...the legislation is not at all intuitive and no reasonable man would have expected the outcome". The mistake led to ‘devastating tax consequences’ was of a sufficiently serious nature based on the test in the Supreme Court case of Futter v R & C Commrs; Pitt v R & C Commrs  BTC 126 (Pitt v Holt). The UT allowed him rectification and that his tax position is to be determined as if that remedy had been granted.
In its findings, the UT noted: ‘The CIOT has been calling for a change to what it claims is complex, disproportionate and opaque tax legislation on a partial surrender of life insurance policies. A number of cases directly related to part surrenders under ITTOIA are currently stayed awaiting the outcome of Mr Lobler’s case. Rectification may not be open to all the persons affected and therefore the analysis of Mr Lobler’s human rights is of significant public interest.’
Patrick Stevens, CIOT’s tax policy director, has pointed out that Lobler had taken partial surrenders from a number of policies, rather than just one, suggesting that rectification may not be available to someone who had a single policy, depending on circumstances.
The CIOT notes that there are other cases involving taxpayers in similar circumstances which had been stayed pending the outcome of this appeal and it plans make a formal submission to HMRC and the Treasury with a view to obtaining a change in the law.
If Mr Lobler made a mistake when he completed his self-assessment tax return, then tax law has its own solution: he would have been able to claim Overpayment relief (formerly error or mistake relief). Perhaps life companies will now all add a note to their fund withdrawal forms so that so may taxpayers do not fall into the same trap.
The UT ruling is here: http://www.tribunals.gov.uk/financeandtax/Documents/decisions/Lobler-v-HMRC.pdf