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‘Outrageously Unfair’ $560,000 Income Tax Bill Slammed

In circumstances where an unwary taxpayer incurred a $560,000 income tax liability through the partial surrender of life insurance policies, the First-Tier Tribunal has lamented the ‘outrageously unfair’ result arising from a combination of prescriptive legislation and the taxpayer’s own ill-advised actions.

The taxpayer had made no profit or gain from the partial surrender of life policies in which he had invested $1.4 million. However, by operation of chapter 9 part 4 of the Income Tax (Trading and Other Income) Act 2005, he was treated as having realised taxable income of $1.3 million. His resultant tax liability exhausted his life savings and had the potential to bankrupt him.

The tribunal expressed extreme disquiet over the unfair impact of the legislation on the taxpayer who had not realised the dire tax implications of his actions, but nevertheless ruled, ‘with heavy hearts’, that it was obliged to dismiss his appeal against the tax assessment. The tribunal noted that the injustice wrought on the taxpayer could be viewed as a breach of his human right to peaceful enjoyment of his private possessions. However, the tribunal noted that it had no jurisdiction to review decisions of Her Majesty’s Revenue and Customs which were taken in accordance with statute law.

In a powerful judgment, the tribunal observed: “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 these circumstances than to permit other taxpayers to avoid tax on undoubted income”.