Investors who have overpaid tax when drawing money from investment bonds could reclaim it through the courts following a ruling in favour of an investor who was landed with a £383,000 tax bill.
The Upper Tribunal ruled in favour of Joost Lobler last week after he challenged HM Revenue & Customs over the bill.
Lobler invested £960,000 in 100 life insurance policies with Zurich Life.
In 2006 he withdrew £510,900 and in 2008 withdrew a further £472,230.
But due to the method of withdrawal he chose, he was ordered to pay £383,000 in tax.
Tax withdrawals from investment bonds can be made either by withdrawing across each of the individual policies, or by selling one or more of the individual policies. The method chosen can have a significant impact on the tax the individual must pay.
The judgment says: “This large tax liability is the direct result of Mr Lobler selecting Option C on the claim form provided by Zurich rather than a different option under which the deemed chargeable gain and therefore the tax charge on Mr Lobler would have been significantly lower.”
The tribunal ruled that in circumstances where the mistake is deemed to be sufficiently serious, the individual should be put in the same position they would have been had the most efficient withdrawal method been chosen.
Old Mutual Wealth financial planning expert Rachael Griffin says the ruling could open up an avenue for other bondholders to seek to recover tax paid on withdrawals.
She says: “This is a complex area and it is not uncommon for customers to process a surrender themselves, without taking advice, and inadvertently create an unnecessary tax liability.
“The Upper Tribunal ruling could make it possible for those individuals to rectify a mistake which has cost them tens of thousands in tax.”