View more on these topics

Caught in the trap

Last week, I looked at the First-tier Tribunal (Tax) decision in the Chandraprakash Shanthiratnam case and especially at the very helpful reasons that the tribunal gave for that decision. These included a relatively full explanation of how the partencashment rules work and a justification for them while accepting that if due care and attention is not given to how bond encashments are made, some “ludicrous” results can emerge -as they did in this case.

The tribunal sympathetically stated that the blunt method of calculating gain and income can occasion very unrealistic results and those results are at their most unrealistic on the facts of this case where:

  • the surrender is made at an early date (that is, when only one allowance of 5 per cent can be deducted from the receipt);
  • the cash received on the partial surrender is significantly in excess of the deductible allowance; and
  • the most objectionable feature of all, namely that the polices are in fact worth less at the point of the partial surrenders than the premiums paid.

The tribunal went on to state that it was “not for us to give tax advice to the appellant” but (unusually) they also stated they considered they “should draw to the appellant’s attention the broad nature of the rules that are intended to reverse the excessive taxation that has plainly occurred to date.

These rules provide for a relief for deficiencies on the eventual surrender of the various policies (or any of them), the result of which is that if during the life of the policies the policyholder has been treated as having income that exceeds the real total gain on the policies, then in the year when the final surrenders are made, there should be some form of tax relief for the excess taxation already suffered. Thus, if the appellant was now able to surrender the balance of the policies for £100,000, such that in total he had received £150,000 (that is, making no real gain whatsoever), the feature that in year one he had been treated as receiving income of £42,000 (sic) should be broadly reversed, since in the year of final surrenders he should be entitled to tax relief for £42,000 (sic)”.

The tribunal, quite correctly, stated that it is for the appellant to seek detailed tax advice, taking account of all the facts. “Attention needs to be given to the rules for calculating deficiency relief, the issue of whether the appellant will have sufficient income in the year of final surrender to recompense him for the excessive taxation suffered in year one and the issue of whether with an offshore life policy the relief is available in respect of all rates of tax.

“Whilst this decision is one for the appellant himself to take, with the benefit of proper advice, we merely suggest that it would seem prudent, at least in a tax year (or several tax years) when the full value of deficiency relief will be available, for the appellant to consider surrendering these policies, and then thinking about how the released funds can be reinvested in some new, and possibly other, form of investment”.

To get this level of unprompted helpfulness from a tax tribunal clearly shows how much the tribunal felt the “madness” of the result and also the level of sympathy for the taxpayer who they clearly saw as a victim.

The tribunal also mentioned two points on calculation as follows: “There was a suggestion in correspondence that we had seen that suggests that the appellant considers that he did not receive £50,000 but that he actually only received £42,500 because there was a fee charged by the insurer for early partial surrenders. We are surprised by this suggestion because the appellant must know what went into his bank account. The chargeable-event certificate unquestionably indicates that the figure in question was £50,000 and that the £7,500 figure was the product of the 5 per cent calculation that we have explained above.  Were our assumption to be wrong however, and were the appellant only to have received £42,500 on the partial surrender, then it would of course follow that the assess-ment should be revised downwards to income of £35,000.”

The other point on calculation that the tribunal mentioned is that “a completely different result would have arisen had the partial surrenders of all of the 50 policies been effected by making total surrenders of roughly one-third of the 50 policies.

In that situation, no income tax would have been chargeable because there would have been no gains on the total surrender of the surrendered policies but also no relief would have been given for the feature that each of the surrendered policies would have had a surrender value that fell short of the premium paid for the surrendered policy.”

“Whilst the appellant would have avoided the tax charge on £42,500 that has in fact arisen, had the 2007 transaction taken the form of a total surrender of roughly one-third of the policies, it appears to us that this feature is irrelevant to this appeal. We say this because the appellant has not contended that the surrenders took the form of total surrenders of some of the policies, and more particularly because the chargeable-event certificate clearly records a tax liability on £42,500 and it also refers to the surrenders as being made in respect of each of the 50 numbered policies.

“We admit that we are at something of a loss to understand what tax advice was given to the appellant prior to effecting the 2007 transaction, and whether it was made clear to the appellant that the immediate tax liability would be considerably influenced by the precise form that the surrender transaction took.”

…Exactly!

The final comment made by the tribunal is also very telling .They stated that: “We consider that the appellant has been most unfortunate to have fallen into a trap, occasioned by what can perhaps be described as rather ’broad-brush’ legislation that does not always (at least until the final surrender) occasion very fair results, and we extend our sympathy to the appellant.”

Next week, I will look at the ways to avoid and deal with the situation if an investor has indeed fallen into the trap.

Access full CPD, technical updates and business generation ideas through Techlink Professional. Go to www.techlink.co.uk and click the Contact Us link at the top of the screen and then request your free trial from the dropdown menu.

Recommended

TPR fears over DC protection

The Pensions Regulator has outlined concerns about the level of protection offered to investors in defined-contribution pension products as the Government prepares to roll out automatic enrolment into workplace pension schemes. Earlier this month, the regulator issued a statement clarifying the role of the trustee in a DC scheme. TPR also plans to produce a […]

Hermes manager Wilkinson joins RLAM

Neil Wilkinson has joined Royal London Asset Management as manager of its £552.3m Royal London European growth fund. Wilkinson will take over from Kevin Lilley who is to join Old Mutual Asset Managers to take over its Old Mutual European equity fund. The new manager joins after more than seven years at Hermes Fund Managers, […]

3

HSBC head of financial planning quits

HSBC head of financial planning and premier banking Paul Stanley has resigned, the week’s Money Marketing reveals. The company says Stanley left this month for personal reasons. HSBC has not yet appointed a replacement. Head of wealth business development Adrian Keane-Munday, head of financial planning Norman Kimber and head of premier Richard Knight will take […]

Martin Foden discusses how convenience is affecting the construction of fixed income portfolios

In this short video, Martin Foden, head of credit research at Royal London Asset Management, discusses how convenience is affecting the construction of fixed income portfolios. Watch the video in full The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com