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Do top slicing relief rules need a rewrite?

They have been ‘drafted in such a way that it remains difficult to interpret’

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Top slicing relief is valuable for individuals who make chargeable event gains on life assurance bonds.  The idea behind the relief flows from the fact that the investment growth, which usually accrues over many years, is taxed in a single year, writes Gerry Brown, trust and estate planning specialist at QB Partners.

This could ‘push’ the individual into a higher tax band. Top slicing relief offers a degree of averaging of the tax on the gain  and eliminates some, or all, of the tax charged at higher or additional rate.

It aims to tax the total gain at the rates that would have applied if only one year’s worth of the gain, the so called annual equivalent, was included in taxable income.

The calculation of the relief can be complex. In recent years, the imposition of an income limit of £100,000 ($125,600, €117,580) on the availability of personal allowance and the introduction of the personal savings allowance has increased this complexity.

Doubts had grown over recent years as to the validity of the relief calculation promoted by HM Revenue & Customs (HMRC). Prominent among the doubters was a chartered accountant, Tim Good, who wrote a number of articles on the topic.

Cases

In 2019, the tax tribunal considered the calculation of top slicing relief where the chargeable event gain took the taxpayer’s income over £100,000. The consequence, in taxing the taxpayer’s income for 2015-16, was that the personal allowance was reduced to nil.

The taxpayer, Mrs Silver, argued that when calculating the tax on the ‘slice’ her full personal allowance was available as her revised total income, including the slice rather than the full gain, was less than £100,000. HMRC had maintained that the personal allowance was eliminated in calculating the tax on her total income and the tax on the slice. The tribunal found in favour of Mrs Silver.

HMRC appealed that decision but subsequently withdrew the appeal and legislation was introduced in 2020 designed to clarify the law in relation to top slicing relief.

The 2020 legislation made two significant ‘clarifications’

‘In determining the amount of the individual’s personal allowance … (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’. In other words, the full personal allowance can be using in determining the tax on the slice. This accords with the reasoning in Silver.

Finance Act 2020 also provided that within the top slicing relief calculation, reliefs and allowances available must be set-off, as far as possible, against other income in preference to the gain. This is a specific departure from the general rule requiring reliefs and allowances to be set against income in a way that results in the greatest reduction in the income tax liability.

Lack of clarity

Unfortunately the position has not been fully clarified. In a tribunal case in January of this year, Sally Judges, as a representative of the late Mr R Young, was represented by Tim Good.

The difference in tax between his calculation and that proffered by HMRC came to £44,000. The tribunal judge effectively followed the approach in Silver.

The judge said: “HMRC’s submissions give rise to some complex interpretive issues on which neither they nor the appellant provided the Tribunal with much assistance in resolving.  Though with respect to Mr Good, he provided more assistance than HMRC, whose role it really should have been.  HMRC essentially submit that the Tribunal should interpret the pre-amended legislation as if the amendments had retrospective effect.”

It should be of concern that the legislation has been drafted in such a way that it remains difficult to interpret. Piecemeal attempts to clarify matters have failed.

Perhaps what is needed is a complete re-write of the top-slicing relief legislation  – perhaps following a wide ranging consultation. How many taxpayers have lost out because the HMRC view has gone unchallenged in the past?

This article was written for International Adviser by Gerry Brown, trust and estate planning specialist at QB Partners. 

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