Advisers must understand how to calculate top slicing relief

  • Explain what top slicing relief is
  • Outline the changes HMRC has made to calculating top slicing relief
  • Explain how allowances are determined
Advisers must understand how to calculate top slicing relief

Top slicing relief has been a hot topic for the past year or so.

Since the beginning of 2019 we have seen HM Revenue & Customs change its calculation method, lose a First-Tier Tribunal tax case (the Silver case), introduce new legislation in the Budget, and withdraw its appeal against the decision in the Silver case. This has kept the calculation of top slicing relief firmly in the news.

But what does this all mean for those who have chargeable gains on their investment bonds going forwards?

The key thing to understand is that the shorthand method of top slicing many advisers will have relied upon to work out the additional tax on the bond gain will no longer be reliable in many cases.

This means advisers need to get to grips with the new calculation method to be able to accurately determine the tax payable when clients have bond gains.

Bond gain taxation

Investment bonds enjoy unique tax treatment.

They are subject to income tax on both income and investment growth.

But tax is only payable when there is chargeable event such as the death of the last life assured, surrender of the bond or taking withdrawals in excess of the cumulative 5 per cent allowance.

They are available as either on-shore or off-shore bonds. 

Off-shore bonds are often located in jurisdictions such as Dublin, the Isle of Man and the Channel Islands where no tax is applied to income and gains within the funds to allow them to roll-up gross.

UK bonds on the other hand pay corporation tax at 20 per cent on non-dividend income and capital gains.The investor receives a 20per cent tax credit for the tax deemed paid within their bond to offset against their tax liability when a chargeable gains arises.

The ability to defer taxation makes both on-shore and off-shore bonds hugely popular investments. 

However, it can also mean investment returns accrued over many years are taxed in a single tax year. Consequently, it may mean more tax payable at higher rates.

What is top slicing relief?

To overcome this spike in taxable income, top slicing relief aims to put the taxpayer back into the position they would have been in if it had been taxed annually over the investment period.

Relief is only available if some part of the full gain is subject to tax at higher or additional rate when added to other income.

Many advisers may be familiar with a shorthand method of top slicing. This does not calculate the amount of relief, but uses averaging to determine the additional tax payable on the bond.

This works by dividing the gain by the relevant number of policy years held and adding it to all other income to determine how much additional tax (if any)would be payable on the average gain.


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