Lobler v Revenue and Customs Commissioners

JurisdictionUK Non-devolved
CourtUpper Tribunal (Tax and Chancery Chamber)
Judgment Date26 March 2015
Neutral Citation[2015] UKUT 152 (TCC)
Date26 March 2015
[2015] UKUT 0152 (TCC)
Upper Tribunal (Tax and Chancery Chamber)

Mrs Justice Proudman DBE

Revenue and Customs Commissioners

Michael Firth, instructed by Smith Pearman, Chartered Accountants, appeared for the appellant

Jonathan Davey, instructed by the Solicitor and General Counsel to HM Revenue and Customs, appeared for the respondents

Income tax Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), Pt. 4, Ch. 9 Effect of partial surrenders of insurance policies by individual Did claimant make a mistake for which rectification is available? Yes Should ITTOIA 2005, s. 539 or Taxes Management Act 1970 (TMA 1970), s. 50 be read so as to remove restrictions on deficiency relief or to reduce the tax payable? No Can the FTT entertain the public law issues? No.

The Upper Tribunal (UT) has overturned the First-tier Tribunal (FTT) decision in Lobler TAX[2013] TC 02539, ruling that the taxpayer had made a mistake when surrendering life insurance policies and rectification was available.


The appellant (Mr Lobler) came to the UK for work purposes, he sold his house in the Netherlands and invested the proceeds and further borrowings in life insurance policies with Zurich Life (Zurich). He subsequently made several withdrawals of funds from the policies in order to repay a loan and fund the purchase and renovation of a house. Mr Lobler did not take independent advice when he withdrew the funds and on the withdrawal forms he elected as his surrender option partial surrender across all policies from specific funds. Mr Lobler assumed that because he had withdrawn no more than what he had paid for the policies, no taxable gain would arise and therefore he made no mention of the withdrawals in his tax returns.

HMRC amended Mr Lobler's tax returns to include his income arising from the withdrawals from the insurance policies, with each withdrawal producing a deemed gain under the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), s. 507. This meant that he had a substantial tax charge representing an effective tax rate of 779% on actual income generated by the policy. If instead Mr Lobler had opted for a full surrender of some policies, his tax charge would have been much lower.

Mr Lobler appealed to the FTT against HMRC's amendments, contending that he made a mistake in the way he withdrew the funds from the policies. The FTT reluctantly dismissed his appeal and whilst finding it to be an outrageously unfair result, found that it was unable to interfere with HMRC's amendment to Mr Lobler's tax return. Although it considered ordering the rectification of the withdrawal forms, the FTT found that the authorities in relation to rectification suggested that, among other things, the taxpayer should show that the parties had a common continuing intention, in respect of the particular matter in the instrument to be rectified and there was nothing which suggested that Zurich had any intention at all in relation to the withdrawals sought by the taxpayer.

Mr Lobler appealed to the UT, which allowed the appeal on the ground of rectification. The UT decided that it was Mr Lobler's unilateral intention that fell to be examined and not any bilateral intention and therefore Zurich's intention was irrelevant. However Mr Lobler also had to prove that the mistake was a serious one. The UT found that it was clear that the mistake made by Mr Lobler leading to the devastating tax consequences was of a sufficiently serious nature based on the test in the Supreme Court case of Futter v R & C Commrs; Pitt v R & C Commrs TAX[2013] BTC 126 (referred to as Pitt v Holt). The UT also decided that the FTT did not find that Mr Lobler was careless when he filled in the form and even if this was wrong, the level of carelessness in not taking advice when he filled in the form was not such as would deprive him of the remedy of rectification. Mrs Justice Proudman found that it was a suitable case for rectification and therefore Mr Lobler's tax position should be determined as if the partial but almost complete withdrawal be a full withdrawal. All the other grounds of appeal based on human rights law and public law were dismissed. The UT noted that the FTT were correct to find that whether or not HMRC acted unlawfully or ultra vires by refusing to amend Mr Lobler's tax return was a question for judicial review, not for an appeal.


This case draws attention to the complex (and many would say unfair) tax regime governing part surrenders of life insurance policies in ITTOIA 2005, Pt. 4, Ch. 9, which the UT described as being unintuitive, unexpected and surprising for most policyholders'.

The CIOT became involved in the case, being permitted to make both written and oral submissions, because there are other cases involving taxpayers in similar circumstances which had been stayed pending the outcome of this appeal. The CIOT is in the process of gathering information to make a formal submission to HMRC and the Treasury with a view to obtaining a change in the law.


[1] This is an appeal by the taxpayer Joost Lobler from the decision of Judge Charles Hellier and Kamal Hossain FCA FCIB sitting in the First-tier Tribunal of the Tax Chamber (the FTT). The FTT decided that it was unable to interfere with the amendment made by HMRC to the Appellant's tax return under legislation (Chapter 9 Part 4 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA)) which treats prescribed sums arising in relation to policies of life assurance as being liable to income tax.

[2] The FTT dismissed the appeal with heavy hearts [28], and observed in [1], [3] and [4] that:

In this appeal a remarkably unfair result arises as a result of a combination of prescriptive legislation and Mr Lobler's ill-advised actions

He made no profit or gain as that term is commonly or commercially understood and yet he becomes liable to pay tax which exhausts his life savings and may bankrupt him. That is an outrageously unfair result.

The appeal takes place at a time when there is great media and political comment about a fair tax system. That interest focuses on the avoidance of tax by those who have substantial income, but to our minds 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.

[3] The legislation has also attracted serious judicial criticism in four other cases in the FTT.

[4] In this appeal Mr Firth appears for Mr Lobler and Mr Davey for the Commissioners for Her Majesty's Revenue and Customs (HMRC). Pursuant to a direction of Judge Sinfield in the Upper Tribunal (the UT) under r.5(3)(d) of the Upper Tribunal Rules 2008 (as amended) (the Rules) the Chartered Institute Of Taxation (the CIOT) was permitted to make written submissions.

[5] Observing on the first day of the hearing that the CIOT was present in the person of (possibly among others) Ms McCarthy, its Counsel who had made those written submissions, and believing that I should have the benefit of hearing her submissions in detail and that both parties should have the opportunity to respond to them fully, I gave a direction that she be permitted also to address this Tribunal orally. The CIOT's interest is that further appeals, claims for judicial review and other disputes with HMRC, where taxpayers face similar consequences to those affecting Mr Lobler, have been stayed pending the outcome of this appeal. In its application under r.5(3)(d) of the Rules the CIOT gave details of some of those other cases. The CIOT is in the process of gathering information from other interested parties and professional bodies in order to make a formal submission to HMRC and the Treasury with a view to obtaining a change in the law.

[6] Both Judge Sinfield and I made (unopposed) orders under r.10(4) of the Rules that each party to the appeal on the one hand and the CIOT on the other should bear their own costs in relation to the application and their respective submissions, written and oral.


[7] ITTOIA deems a person making a partial surrender of each insurance policy which he holds as having realised taxable income in the relevant years, notwithstanding that he may have made no actual profit or gain on the policy.

[8] The facts of Mr Lobler's case are set out in detail in [6][13] of the decision and the legislation is set out at [14][17].

[9] In brief, Mr Lobler is a Dutch national. In early 2004 he came to England for work purposes with his wife and two young children. In 2005 he sold the family home in the Netherlands for the rough equivalent of 350,000. This sum represented Mr Lobler's entire life savings and he decided to invest all of it in life insurance policies with Zurich Life (Zurich), an insurance company in the Isle of Man.

[10] He then took out an interest-bearing loan from HSBC of another $700,000 and invested this sum in further life insurance policies with Zurich. Mr Lobler's total investment with Zurich amounted to approximately $1,406,000 invested on 1 March 2006 in 100 life insurance policies. It does not appear that tax avoidance was a purpose influencing the choice of financial product in which Mr Lobler invested.

[11] In 2006 Mr Lobler bought a house in England for use as his family home. On 28 February 2007 he withdrew $746,485 from the policy to repay the HSBC loan of $700,000 including the accrued interest. On 29 February 2008 he withdrew a further $690,171 which he used to pay for the house and various renovation works. In short, he withdrew from the policies by way of partial surrender of each policy a total of 97.5% of the amount he had originally put in.

[12] The effect of the legislation is as follows. When Mr Lobler made partial surrenders, the value surrendered for the purposes of s. 507 ITTOIA was the amount received. For each year the s. 507 calculation produced a deemed gain equal to the amount received less 5% of the premium originally paid. A chargeable event arose...

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