The bond premium was supplemented with a loan from HSBC of $700,000, resulting in a total investment of $1,406,000. This investment had been arranged for Mr Lobler by HSBC Private Banking. Mr Lobler had told them about his plans and assumed that he did not need any further independent advice. He took no advice before taking withdrawals from the bond.
In 2006, Mr Lobler bought a house in England. He withdrew $746,485 from the bond on 28 February 2007. This was used to repay the loan from HSBC. On 29 February 2008, he withdrew a further $690,171 to pay for his house.
Withdrawals were executed by completing a form provided by Zurich. This offered four surrender options: full surrender; partial surrender across all policies and funds, partial surrender across all policies from specific funds, and full surrender of individual policy segments. Mr Lobler put an "X" in the box opposite the words "partial surrender across all policies from specific funds"; he put the amount he wished to raise in the next box and selected the funds from which the withdrawal should be made. He stated that the reason for the withdrawals was that he was buying a property.
Mr Lobler assumed that because he had withdrawn no more than he had paid for the bond, no taxable gain would arise. The withdrawals were not mentioned in his self assessment returns. Zurich provided HMRC and Mr Lobler with chargeable event certificates showing gains of $676,184 in respect of the 28 February 2007 withdrawal and $619,871 in respect of the 29 February 2008 withdrawal.
HMRC opened enquiries and eventually included the above amounts as taxable income. This was appealed.
The Tribunal summarised the relevant legislation which “… provides for a calculation to determine whether a gain arises, and to calculate a gain if rights under a policy have been surrendered. The calculation requires that the gain is equal to the excess of the value of the any part of the policy surrendered over 5% of the premiums paid for the policy. The calculations are performed annually on a cumulative basis … provides that if a share in the rights conferred by a policy is surrendered the value of that share … is the amount or value payable because of the surrender.”
That process gave the gains calculated by Zurich and notified to HMRC and to Mr Lobler. The Tribunal stated that, “… though we have struggled so to do, we can find no way to give a different interpretation to the legislation.” And concluded “Thus with heavy hearts we dismiss the appeal.”
The triggering of unexpected and unwelcome bond gains is an all too frequent occurrence. There is a tendency for clients to act on their own initiatives – usually with disastrous consequences. Advisers must educate clients to contact them before executing surrenders.
Gerry Brown is technical manager at Prudential