There is a window of opportunity for individuals to make a protective overpayment relief claim to HM Revenue & Customs, but the deadline is approaching fast.
A recent First-tier Tribunal decision found that legislation introduced in the Finance Act 2020 changing the rules governing the calculation of top slicing relief (TSR) amounted to new legislation as opposed to clarifying existing legislation.
This may create an opportunity to claim a refund for the 2017-18 tax year, but investors only have until April 5 2022 to apply.
Life assurance bonds subject to certain trigger events, including death of the insured, maturity, surrender (including partial), sale or assignment, may give rise to a chargeable event gain.
The whole gain is subject to income tax in the tax year in which the event arises.
TSR allows the gain to be annualised to reduce or eliminate liabilities to higher or additional rate tax.
Method of calculating TSR evolved
The introduction of tapering of the personal allowance for individuals with an income of £100,000 or more, along with the introduction of the personal savings allowance, resulted in the need to undertake a series of prescribed steps to calculate the relief.
The interaction of these changes with existing legislation for calculating TSR was the subject of tax case Silver v HMRC  UKFTT 263 (TC), where the tribunal ruled in favour of the taxpayer. HMRC initially appealed the decision to the Upper Tribunal before withdrawing its appeal.
The TSR legislation was then changed to:
- Allow recalculation of reduced personal allowances within the TSR calculation in cases where it has been reduced due to a gain in total income; and
- Clarify that beneficial ordering does not apply to TSR calculations – ensuring personal allowances are set against other income in preference to gains within that calculation.
The revision was announced in the March 2020 Budget and introduced in the Finance Act 2020. The legislation was intended to apply to the 2019-20 and subsequent tax years. HMRC by concession also extended it to cover the 2018-19 tax year.
However, HMRC maintained the stance that its interpretation of the legislation for 2017-18 and earlier tax years remained unchanged, as it was based on practice generally prevailing at the time. This formed the basis of it rejecting claims made for these years.
HMRC position challenged
This position was challenged in a recent tax case, Judges v HMRC  UKFTT 77 (TC), where the First-tier Tribunal considered the same TSR issues as in the Silver case and reached the same conclusions.
Importantly, the judgement in the case, which related to the 2017-18 tax year, also confirmed that legislation introduced in 2020 (at s37 Finance Act 2020 removing beneficial ordering) was not a clarification of existing legislation and therefore could not be applied retrospectively. The decision was reached on February 18 2022 and HMRC has until April 15 2022 to challenge it.
While decisions of the First-tier Tribunal do not generally create a legally binding precedent, they can be influential in other decisions that consider the same subject matter, as the logic and arguments put forward in reaching their conclusions may provide useful insight.