HMRC publishes guidance for affected taxpayers
HM Revenue & Customs (HMRC) has published guidance for taxpayers wanting to request a recalculation of a wholly disproportionate gain arising from a part surrender or a part assignment for money or money’s worth.
The chargeable events legislation has been changed to allow a recalculation following the much-publicised case of Joost Lobler and his successful appeal for rectification after unintentionally creating a large excess withdrawal charge. Mr Lobler made a total investment of about $1,406,000 into a life insurance policy and then within two policy years withdrew by way of partial surrender across all segments a total amount of about $1,390,171.
Importantly, Mr Lobler didn’t take advice before proceeding and believed he was allowed to withdraw his original investment without a tax consequence. Unaware of the 5% allowance and the liability to income tax that arises when exceeding it; his actions generated taxable income of about $1,300,000 and tax payable of $560,000.
Making an application for a recalculation
The new legislation allows an interested person – a person liable to all or some of the tax payable – to apply for a recalculation of the disproportionately large chargeable gain. All interested persons must apply which includes joint policyholders and both assignor and assignee where there has been a part assignment.
There is no prescribed format for making an application but HMRC will require as a minimum the following:
- The chargeable event certificate showing the gain
- A copy of the withdrawal request
- Relevant correspondence between the interested person and the insurer
- An explanation as to why cash was taken from the policy in the way that it was; and
- Any other relevant documents or information in support of the application.
HMRC has set a high threshold for what is a disproportionate gain
HMRC anticipates that wholly disproportionate gains will only arise in limited circumstances and generally when large withdrawals occur during the early years of a policy. Just because a gain is large does not make it a disproportionately large gain. HMRC will consider the premium size, underlying economic value of the policy and the amount of tax payable, amongst other factors they may consider relevant.
