TaxMay 20 2020

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

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.

This is then multiplied by the number of years held to arrive at the additional tax. 

But since HMRC introduced changes to the calculation method for top slicing relief to account for the personal savings allowance and starting rate for savings, this shorthand method will no longer provide an accurate reflection of the additional tax due in many circumstances.

How is top slicing relief calculated?

The only way to get an accurate result every time is to follow the prescribe method outlined by HMRC.

Here the full chargeable gain is added to other income and tax is calculated in the normal way. If any part of the gain is taxable at a higher rate, top slicing relief will be available as reduction to the overall tax bill.

The amount of relief is broadly the difference between the tax payable on the full gain and the tax payable on the averaged gains over the relevant period of the investment. 

However, just for the purposes of calculating the amount of relief available, there are some important differences to the standard tax calculation rules:

  • Both on-shore and off-shore bonds are treated as the highest part of income.
  • Both on-shore and off-shore bonds are deemed to have had tax treated as paid at 20 per cent (this amount is reduced if any part of the bond gain falls within the personal allowance).
  • Since March 11 2020, the personal allowance used when calculating the tax on the averaged gain has been based on the income plus the average gain.

The top slicing period

The number of years used to work out the averaged gain will depend on how the gain has been made. 

For full surrenders and deaths, the chargeable gain is divided by the number of complete years the bond has been in force.

For part surrender (in excess of the 5 per cent allowance), the period used for top slicing will depend upon when the bond was taken out and whether it is an on-shore or off-shore bond.

Off-shore bonds established before April 6 2013 will have a top slicing period dating back to the inception of the bond, provided that they have not been incremented or assigned after that date.

All on-shore bonds will have the top slicing period shortened if there have been any previous chargeable events as a result of taking more than the cumulative 5 per cent allowance. 

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