The Chartered Institute of Taxation (CIOT) and its Low Incomes Tax Reform Group (LITRG) have welcomed the Government’s commitment to change the law to avoid people being taxed unfairly on their life insurance policies.
The CIOT has pushed for a change to the law in informal discussions with HMRC because of serious concerns about the taxation of gains after the much publicised case of Joost Lobler in 2015, who had faced an effective tax rate of more than 700 per cent.1 The CIOT was permitted to make submissions in Mr Lobler’s appeal because of the wider public interest in the case. The tax institute has since been instrumental in liaising with other organisations in the insurance industry and the tax profession, as well as with HMRC, to bring about law reform.
The CIOT wants to put an end to income tax charges on life insurance policies that are completely disproportionate to a taxpayer’s income from them.
It praised HMRC for its commitment to changing the law in its response to a consultation on the changes which includes a number of options.2
Aparna Nathan, Chair of CIOT’s CGT and Investment Income Sub-committee, said:
“The problem with the rules is that they are overly complex and it is elderly or retired taxpayers that are left particularly vulnerable because of the way the tax regime operates and face a devastating loss of life savings and even bankruptcy.
“The informal consultation with HMRC in the lead up to this consultation took place against the background of a number of tribunal decisions where the tax regime governing partial surrender of life insurance policies was subject to severe judicial criticism because of its disproportionate and unfair effect.
“We welcome the constructive engagement from HMRC on this matter.”
At present, a quirk in the tax system means that policyholders who partly withdraw substantial sums early on can unintentionally trigger swingeing income tax charges that far exceed the economic growth of the policy.3
The CIOT’s Low Incomes Tax Reform Group (LITRG) also responded to the consultation.4 Of the three options, LITRG favours the suggestion of a 100 per cent deferred allowance, on the basis that this achieves both simplicity and fairness, as it ensures only economic gains are taxed. The CIOT ranks this among its two favoured options, the other being to retain the current five per cent tax deferred allowance but bring into charge a proportion of the economic gain (calculated by formula) whenever an amount in excess of five per cent is withdrawn.
Anthony Thomas, Chairman of LITRG, said:
“We think that simplicity should be a key driver in this reform. It is essential that the rules are easy for the taxpayer to understand. In addition, only economic gains should be taxed.
“None of the options is perfect by any means. In some situations, the 100 per cent deferred allowance option might lead to an overall higher tax charge than the suggestion of a formula approach unless top slicing relief is retained. The complexity of the formula approach would make it far more difficult for the unrepresented taxpayer to understand, even if insurance companies were to provide policyholders with detailed supporting information, which is also likely to be complex.
“On balance, LITRG favours the introduction of a 100 per cent deferred allowance, since it would achieve simplicity and in addition, it would ensure that only real, economic gains are taxed.”
Notes to editors
1. In Joost Lobler v HMRC [2015] UKUT 152 (26 March 2015), the Upper Tribunal allowed the taxpayer’s appeal on the ground of rectification.
The First Tier Tribunal had found against Lobler with ‘heavy hearts’ as he was faced with an effective tax rate of 779 per cent. Lobler, a Dutch national, had moved to England. He had sold his home and invested the proceeds (as well as borrowings) in Zurich Life life insurance policies. He had subsequently made several withdrawals from the policies. Under ITTOIA 2005 s 507, each withdrawal had produced a deemed gain.
The Upper Tribunal noted that the mistake was unilateral, made by Lobler alone. Zurich had simply followed Lobler’s instructions and so Zurich’s intention was irrelevant. The Upper Tribunal added that Pitt v Holt [2013] UKSC 26 was authority for the proposition that a mistake as to the tax consequences of a transaction may be sufficiently serious to warrant rectification.
Additionally, even if Lobler had been careless in not seeking advice when completing the withdrawal form, this carelessness did not deprive him of the remedy of rectification.
The Upper Tribunal found, however, that Lobler’s human rights (under the European Convention on Human Rights article 1 Protocol 1) had not been breached. The relevant provision does not allow for arbitrary interferences, as it is highly prescriptive. Finally, the Upper Tribunal held that the issue of whether HMRC had acted unlawfully in refusing to amend Lobler’s return was a question for judicial review, not for an appeal. (Tax News, April 2015)
2. The CIOT’s response to HMRC’s consultation can be read here.
3. A quirk in the tax code deems the full value of the rights surrendered on a part surrender – not just any economic profit or gains – to be income, after deducting five per cent of the total premium invested for each policy year. On a part surrender or part assignment the full value of the rights surrendered or the full value of consideration received is the amount treated as the policyholder’s income, after a deduction of five per cent of the total premium invested for each policy year. Any excess above the cumulative five per cent threshold is, however, taxed in the year of part surrender. Accordingly, policyholders who partly withdraw substantial sums early on can unintentionally trigger swingeing income tax charges that far exceed the economic growth of the policy.
4. LITRG’s submission can be read here.
5. The Chartered Institute of Taxation (CIOT)
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.
The CIOT’s 17,600 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Low Incomes Tax Reform Group
The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 17,600 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact: Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk (Out of hours contact: George Crozier, 07740 477 374)
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