The importance of seeking advice

An interesting article recently published in a financial services magazine has highlighted the importance of seeking advice in seemingly straightforward situations.

An investor had placed almost £1 million in a number of investment bonds in 2006. Then in 2007 and 2008 he took two large withdrawals totalling almost 98% of the original amount invested. These withdrawals were treated as ‘partial’ surrenders which gave rise to a very large income tax bill.

The investor had, in his mind, made capital withdrawals and therefore did not think it necessary to report anything on his annual Self-Assessment return. What he had failed to realise is that withdrawals from investment bonds are chargeable to income tax, and the manner in which tax is calculated depends on whether withdrawals are taken as ‘partial’ across all segments of the bond, or by full withdrawals of individual segments.

This is a massively important distinction as, in this case, an income tax bill of £382,407 resulted from the partial withdrawals, rather than a likely zero liability had the withdrawals been properly advised and taken from whole segments. Naturally HMRC went after him.

This investor felt aggrieved, not unsurprisingly, and sought to challenge the tax liability in court. HMRC argued that the investor was “careless” in not taking advice “as to the consequences of his choice”. Whilst giving permission to appeal the decision, the judge stated: “[HMRC] pressed on me that [the investor] could and should have taken advice as to the best means of withdrawals from the policies. The true analysis of the matter is only that [he] now wishes that he had not done what he did”.

Now, this is an interesting point to consider with the new pension freedoms that are now available –
“… now wishes that he had not done what he did”. We can readily foresee this regretful sentiment being expressed rather too much in the future. With the ability to draw large amounts from pensions it is not just the foreseeable (though perhaps not foreseen) tax consequences, but also the arguably much more significant consequences later in life when there’s no money left. This highlights the paramount importance of seeking and following professional advice.

The choice is yours: “wishes that he had not done what he did” or “glad he had sought advice on what to do”.


Philip Chandler

Chair of Aspinalls Technical Committee