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4 min read 20 May 21
In order to understand why there have been changes to top slicing relief announced in the budget, it’s useful to have a quick recap of how we got here.
Insurance bonds produce no income to tax and accordingly are subject to special tax rules called the chargeable event regime. Under this regime, tax is only payable when a gain is calculated on a chargeable event. In view of the fact that investors could be disadvantaged by being taxed in a single year on gains that have accrued over a period of time, ‘top slicing relief’ spreads the gain over a number of years and aims to tax the “slices” as opposed to the full gain.
Top slicing relief is a tax reducer which means it is deducted from the individual’s tax liability at step 6 of the Income Tax calculation.
In simple terms, three steps are required to arrive at your top slicing relief.
It looks simple enough however, in recent years there has been some confusion over how top slicing relief should be calculated. This is because the legislation which outlines how it applies contained within ITTOIA 2005 is open to different interpretations.
This confusion cumulated in the court case of Marina Silver v HMRC (TC07013) in 2019.
Mrs Silver fully surrendered a bond in May 2015 which she had owned for approximately 21 and half years. Fully surrendering the bond produced a chargeable gain of £110,721.93 which neither party disputed. This gave rise to a ‘slice’ of £5,272.43 (i.e. £110,721 ÷ 21).
In 2015/16, Mrs Silver’s other income amounted to £31,101 and Mr Silver, acting on behalf of his wife did not include the bond gain in her tax return as they believed she had no tax liability on the gain.
In due course, HMRC picked up on this and opened an enquiry on the basis they believed she owed tax on the gain. When HMRC subsequently closed the enquiry and amended her tax return, they calculated the tax due on the gain of £22,759.13.
The parties both agreed that the individual’s liability was £22,007.
The relieved liability was however disputed. The Silvers argued that taking this calculation in isolation, it comprised other income of £31,101 and a bond slice of £5,272 = £36,373. This fell well below the personal allowance threshold of £100,000 meaning that in this particular calculation, Mrs Silver was entitled to a personal allowance.
As a consequence, Mrs Silver’s liability on the slice (i.e. her relieved liability) was £0 giving rise to top slicing relief of £22,007. The figure of £0 derived from the fact that total income of £36,373 less personal allowance of £11,000 fell below the basic rate limit meaning that the slice was only taxable at 20%, and, as she is given a basic rate credit then the hypothetical liability is £0.
In contrast, HMRC computed the relieved liability assuming a personal allowance of £Nil.
The Tribunal decision
Broadly, the top slice was a hypothetical calculation of what the liability would have been had the gain been added each year. As such, the hypothesis should follow that a personal allowance would have been available each year. HMRC were not allowed to use the actual situation, of not having a personal allowance available, in the hypothetical calculation.
“We prefer Mr Silver’s interpretation of the legislation….Consistently applying the assumption that Mrs Silver’s income was only £36,373.43 meant that she was (in this hypothetical scenario) entitled to a personal allowance in this calculation.”
The Chancellor didn’t specifically mention it however a policy paper has been produced along with draft legislation to insert a clause into S536 and S537 of ITTOIA which deals with calculating the “relieved liability”. The amended legislation will now include the following:
“in determining the amount of the individual’s personal allowance under section 35 of ITA 2007 (but not the amount of any other relief or allowance), it is assumed that the gain from the chargeable event is equal to the amount of the annual equivalent,”
The policy paper also states:
The original policy intent of TSR was to provide relief to taxpayers who have become subject to a higher rate of tax due to a gain being included in their income. The change to the treatment of reduced personal allowances, as set out in the measure, is in line with that original policy intent.”
The changes to the legislation confirmed in this budget back up the decision reached in the Silver case.
Interestingly, the amendments only take effect for relevant gains occurring on or after the budget announcement, which will provide little comfort for those individuals adversely impacted by the previous interpretation of the rules.
In short therefore, this measure allows the personal allowance to be reinstated within the calculation for top slicing relief (other reliefs or allowances will not be reinstated) . This provides additional relief for taxpayers whose entitlement to the personal allowance has been reduced because a total gain is included as part of their income.
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