Although this is the first “reported” case on this point, it is well-known that unintended liabilities occur all too frequently.
At issue in the case is Chandraprakash Shanthiratnam, who ended up the reluctant appellant in our story.
An operator of Shell service stations, Shanthiratnam was required to put up collateral to secure some of his obligations to Shell.
He paid £150,000 as a single premium for overseas life policies (a bond) issued by an Irish life assurance company in the HSBC banking group.
The bond was issued as a cluster of 50 policies, each with a separate policy number. The premium was paid on 22 March 2006.
During the following year, it transpired that Shell no longer required the full collateral, and so Shanthiratnam realised that he could, in fact, surrender approximately one third of the rights under the policies and withdraw £50,000.
This he did – or at least he was treated as having done for tax purposes – on the anniversary of the acquisition of the policies, i.e. on 22 March 2007.
A partial surrender of approximately one third of the rights attaching to each of the 50 policies in the first year of their existence clearly triggered a chargeable event.
As a result of the artificial rules applying to the calculation of chargeable event gains on the occasion of partial surrenders, Shanthiratnam suffered an “extraordinary” result. Although the total policies were probably worth less at the time of the partial surrender than the premium paid, 85% of the amount received (i.e. £42,500 out of the £50,000) was treated as his taxable income.
The chargeable event gain was calculated as follows:
The premium was £150,000, so the annual 5 per cent allowance was £ 7,500; thus:
Surrender proceeds £ 50,000
Allowance £ 7,500
Chargeable event gain £ 42,500
In calculating the total tax liability, HM Revenue & Customs added the £42,500 to his other income. Since the policies were non-qualifying “offshore policies”, no credit was given for tax at the basic rate.
Shanthiratnam appealed to the Tax Tribunal. Unfortunately, he didn’t appear and wasn’t represented. The Tribunal reviewed the facts and the applicable law and dismissed the appeal.
The judge pointed out that:
“Whilst the Appellant would have avoided the tax charge on £42,500 that has in fact arisen, had the 2007 transaction taken the form of a total surrender of roughly one third of the policies, it appears to us that this feature is irrelevant to this appeal.
“We say this because the Appellant has not contended that the surrenders took the form of total surrenders of some of the policies, and more particularly because the HSBC Chargeable Event Certificate clearly records a tax liability on £42,500, and it also refers to the surrenders as being made in respect of each of the 50 numbered policies.
“We admit that we are at something of a loss to understand what tax advice was given to the appellant prior to effecting the 2007 transaction, and whether it was made clear to the appellant that the immediate tax liability would be considerably influenced by the precise form that the surrender transaction took.”
Deficiency relief might be available on a subsequent full surrender of the bond – although that wouldn’t fully compensate for the tax on the “artificial” gain.
Far better for Chandraprakash Shanthiratnam if he had taken some expert advice ahead of his withdrawal of that £50,000.