This relief is needed when a taxpayer cashes in a premium life insurance policy or bond. The lump sum (chargeable event gain) is taxed as the highest slice of income, and as a result the taxpayer may pay more tax in one year than would have been the case if they had received regular amounts of income over the life of the bond.
Top slicing relief attempts to put the taxpayer in the position he would have been in, had the lump sum been paid in equal amounts in each year of the bond’s life. It doesn’t exactly achieve that, but it’s a good approximation.
In our newsletter on 28 September 2017 we warned that HMRC’s software was not calculating top slicing relief correctly in every case. This suspicion has now been supported by the case of Marina Silver, when the tax tribunal found that HMRC’s calculation of her top slicing relief was not in line with the legislation.
In 2015/16 Mrs Silver cashed in a bond with a 21-year term which created a chargeable event gain of £110,721. When this amount was added to her other income for the year, her total net income exceeded £121,200, so she lost the use of her personal allowance for 2015/16.
Silver’s top-slicing relief computation took 1/21 of the chargeable gain (£5272), added this to her other income for 2015/16 to work out the tax payable on that slice, making use of her personal allowance in the process. HMRC said she shouldn’t use her personal allowance in that top-slicing calculation. The judge agreed with Mrs Silver, and the difference in the methodology resulted in an extra £20,000 of tax.
We will review all clients where a top slicing relief calculation has been performed for years 2011/12 onwards, when the personal allowance was restricted for total income over £100,000. Overpayment relief claims can be made for the years 2015/16 onwards, and claims for earlier years can be made using ESC B41.
Written by the Tax Advice Network