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April 28, 2015

Joost Lobler - Case Update

The decision in the case of Joost Lobler was overturned on appeal to the Upper Tier Tribunal (UTT) in January 2015 on the grounds of rectification.

The case concerned a taxpayer who invested $1.4 million, comprising his life savings and a loan from HSBC, into a life assurance policy.

He subsequently made two partial encashments of the policies in order to repay the HSBC loan and buy a house.

Partial surrenders are taxed based on a deemed gain calculated in reference to the amount withdrawn rather than the actual gain on the policy.

Therefore the effect of the partial encashments was that he realised a chargeable event gain of $1.3 million resulting in a UK income tax liability of $560,000 (approx £372,000).  An effective tax rate of 779%.

He later surrendered the policies in full, realising a deficiency of $1.23 million.  This amount was available for deficiency relief but Mr Lobler has insufficient income against which to set the relief.

Had Mr Lobler taken professional advice it is likely that he would have been advised to make a full surrender of the sub-policies and would have avoided the tax liabilities arising from the partial surrenders.

The first tier tribunal found that whilst the result was “remarkably unfair” they did not have the power to overturn HMRC’s assessment because the tax was legally due under the law.

However, after reviewing case law such as Pitt v Holt, the Upper Tier Tribunal concluded that the mistake made by Mr Lobler was of sufficient gravity to permit rectification.

A key point to take away from this case is the importance of obtaining advice before undertaking transactions.

Contact us today to discuss your tax requirements.
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