A legal amendment that was made during the COVID-19 pandemic allowing the witnessing of wills to take place via videoconferencing has officially expired. As of 31 January 2024, the...Continue reading
The tax tribunals are not generally known for a free and easy approach to issues. They do, however, have a degree of discretion to correct obvious errors and a recent case shows that the tribunal judge may use this discretion when failing to do so would lead to obvious unfairness.
The taxpayer involved bought a life insurance policy as an investment in 2004 in order to hold money temporarily after he sold his home in the Netherlands. He invested £350,000. In 2005, he borrowed a larger amount of money which he invested in the same way.
He had no other significant assets. His intention was to buy a property in the UK and, having found a suitable property in 2006, he partially cashed in the policies in 2007 and 2008 to pay for it and the work that needed to be done to it.
The total sums he withdrew were less than his initial investment. However, at this point the UK tax law that deals with partial surrenders of insurance policies came into play.
This operates to treat any amount received as a profit, with an ‘allowance’ of 5 per cent of the sum invested for each complete year the policy ran. The rules that apply when a policy is only held for a very short time are therefore draconian, and in this case led to an Income Tax liability of more than £350,000, despite the fact that there had been no tax avoidance intent when the transactions were undertaken and, had the taxpayer ticked a different box on the surrender form (to surrender the policies in full), the result would have been completely different for tax purposes.
The end result left the taxpayer facing bankruptcy, in effect because he had failed to take advice and had made a simple error.
The First-tier Tribunal rejected the man’s appeal against his tax assessment.
The man’s appeal to the Upper Tribunal on a variety of grounds, including that the decision was a violation of his rights under human rights law, was accepted on one ground alone…that a clear mistake is capable of being rectified to give effect to what the person making the mistake intended.