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An investor faces bankruptcy after incurring a tax bill of £372,000 on a £46,000 gain just by ticking the wrong box on a form.

Joost Lobler invested $1.4 million (£930,000) in an Isle of Man-based investment bond with Zurich Life, the insurer. Half of this money was his life savings boosted by the sale of his home in Holland, with the rest made up with a loan from HSBC Private Bank, which arranged the investment.

As is often the case, the investment bond was made up of a series of single-life insurance policies. Tax rules allow an income of 5% of the original investment into a bond to be taken tax-free each year.

The reason for the multiple policies is flexibility. Investors can also encash one of the policies, or segments, of the bond and just pay the income tax on any gain it has made at their top rate of income tax. Or they can encash all the segments and pay income tax on the total gain in the bond.

However, if they make a ‘partial withdrawal’ from the policies without encashing, or 'surrendering', any of them they are liable to pay income tax on the full amount of money withdrawn.

Unfortunately, this is what Lobler, who moved to the UK with his family in 2004, did.

After selling his home in Holland and buying a house in this country in 2006 he asked Zurich if he could withdraw his funds. The company sent him a withdrawal form with four options. He ticked option C, which makes ‘a partial surrender across all policies from specific funds’. Option A for full surrender of all the policies or option D for full surrender of individual policies would have been better.

He withdrew funds in this way twice, taking $746,485 in February 2007 to repay the HSBC loan and $690,171 in February 2008 to pay for the house and its renovation.

He did not realise taking the money out this way would incur a tax charge of $560,000 with HM Revenue & Customs, which had been notified of his moves by Zurich.

Lobler appealed against HMRC’s decision in the First Tier Tax Tribunal but the appeal was dismissed ‘with heavy hearts’, according to judge Charles Hellier.

In his judgement Hellier said that Lobler ‘did not realise that the effect of making a partial surrender was that almost all the amount he withdrew would be treated as taxable income’ and that if the whole policy had been cashed in only the gain of $70,000 would have been taxed.

Hellier acknowledged that the bill was ‘an outrageously unfair result’ but HMRC had acted in accordance with the rules.

The judge also compared the case to the wider debate over levels of corporate and personal taxation and controversy over tax dodging at a time when the economy is struggling.

'To our minds,' summed up Hellier, 'it is more repugnant to common fairness to extract tax in Mr Lobler's circumstances than to permit other taxpayers to avoid tax on undoubted income.'

This is fortunately quite an extreme example of somebody making quite a simple mistake but suffering drastic financial consequences. It does however demonstrate the importance of using an advisor you can trust. It is our job to help you throughout the entire financial planning journey and ensure instances such as the above are avoided.

Source: 15th March 2013

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