Recalculating gains on part surrenders of life insurance policies: Tax Faculty recommendations for draft clause 13, Finance Bill 2017

Following the Lobler case, draft clause 13, Finance Bill 2017 introduces a process whereby taxpayers who have been taxed on a disproportionate gain on the partial surrender or assignment of their life insurance policies can have the gain recalculated on a just and reasonable basis.

Mr Lobler made a partial surrender of his life insurance policies giving rise to a significant chargeable event and a substantial tax liability. He was taxed on the excess received over and above the 5% withdrawal for each year the policy had been held.

When he surrendered the remaining balance of the policies, he made a loss for which deficiency relief was available, but he had insufficient income to utilise the relief. The change would allow an application to HMRC for a review of the individual’s tax calculation on the grounds that the gain arising from the partial surrender or assignment of a policy is wholly disproportionate.

A consultation was issued in April 2016 and the Tax Faculty response was published as ICAEW Representation 106/16. We now respond to the draft clause 13 Finance Bill 2017 as ICAEW Representation 12/17.

In our view, the term “wholly disproportionate” is very subjective; no guidance is given in the explanatory notes as to what degree of loss would be acceptable for a reworking of the tax charge. Also the loss may not be apparent within the two years allowed for a claim, so the taxpayer will be at the mercy of the officer as to whether the time limit can be extended.

We consider that a change to the legislation is needed in order to prevent cases like the Lobler case occurring again. Many taxpayers affected would not have the resources to go to the courts for rectification and although their loss may be smaller in absolute terms than Mr Lobler’s, it may still be life changing.

Our recommendations

The Tax Faculty has made recommendations for draft clause 13, Finance Bill 2017, ICAEW REPresentation 12/17  Our preferred option would be to retain the existing legislation but to amend the rules for deficiency relief such that the loss can be carried back to the earlier year when a gain was taxed. This has the advantage of simplicity, and like the proposed measure will not require wholesale changes by the life insurance industry. The actual gain will be taxed and it will not be a subjective decision at the whim of HMRC. There is already legislation in place to deal with a similar situation on earn outs in s279A – 279D TCGA 1992.

If the draft clause is to be enacted it would be preferable to change the term “wholly disproportionate” to simply "disproportionate" or even "excessive".