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The Value of Financial Advice
27 April 2016 @ 18:52

The Value of Financial Advice

by Sandy Paterson

The Value of Financial Advice

UK Taxation on Life Insurance Bonds​


The Lobler case

Significant tax problems can be created for those investors considering a large withdrawals (in excess of their 5% allowance) from life insurance investment bonds in the early years of the investment. In particular, they may find themselves liable to being taxed on the full amount of the withdrawal (around 600 policyholders in the UK according to HMRC).

Joost Lobler (a Dutch National) found himself in this unenviable situation in 2007 when HMRC demanded $560,000 (£386649, €497000) in tax on the $1.42m withdrawal he made from a Zurich Life investment bond set up in 2005. The original investment was $1.4m into an Isle of Man Offshore Bond.

How could a tax bill of $560000 be levied on a gain of $200000?

So how could the revenue be asking for $560000 tax on a gain of $200000 in 2 years I hear you ask? Well I suspect that this particular individual whilst he would probably have taken Financial Advice when setting up the bond, he most certainly did not when encashing it and therefore made a common mistake. On withdrawal, instead of closing all of the policies or fully surrendering a number of individual policies which would have been more tax efficient. He unwittingly took the option to partially surrender across all policies from specific funds thereby incurring a tax bill on the vast majority of the withdrawal.

Had he taken correct Independent Financial Advice on encashment or had his original adviser kept in touch and structured the withdrawal correctly his tax bill would have been dramatically reduced.

This case and cases like it have highlighted the ease of making a "mistake" with withdrawals and have propmpted HMRC to review the way withdrawal allowances are constructed.

What are the proposed changes?

Potential changes to the taxation of investment bonds would change the way taxable income is calculated when money is taken out. HMRC has proposed three possible methods of calculating the tax to avoid the sometimes excessive charges to tax on withdrawals:

  1. 100% withdrawal allowance of original capital invested.
  2. Tax the economic gain.
  3. Defer any excessive gains.

Only one of these would be implemented and they are designed to replace the current 5% withdrawal system.

The simplest method would be the 100% allowance taken any time, but when have HMRC taken the simplest method.

Current system

Policyholders can take out 5% of the money they have invested in a bond tax free every year using partial surrenders, or with part-assignment policyholders could sell up to 5% of the policy every year tax free.

Bonds are often constructed in a series of segments (smaller series of life insurance policies). Enabling investors to either convert one of the policies as a withdrawal, or convert segments as withdrawals paying income tax on any gain made - usually at their top rate of income tax. Or an investor can cash in all the segments and pay income tax on the total gain.


All in all a clear case for good, independent financial advice not just when setting up investments but when changes need to be made also.


​Do not fall into the trap of making the wrong choice, with our friendly, knowledgable Independent Financial Advisers on hand you can ensure you make the right choices.

If you are a Spanish Tax Resident you should also consider Spanish Tax Compliant Bonds as a potentially more tax-efficient investment structure.

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