Any Way You Slice It – Silver v HMRC (Top Slice Relief)
Top slicing relief is a valuable tax relief available to taxpayers who have a chargeable event gain on the disposal of a life insurance policy/investment. However, calculating the relief is complex, and often requires specialist knowledge in order to ensure that the tax due is correct. Whilst referred to as a “gain”, such policies are actually subject to income tax.
In the case of Silver v HMRC, Mrs Silver (the taxpayer), disposed of a life insurance bond in 2015/16 realising a chargeable event gain of £110,722. The gain was included on the taxpayer’s tax return for the year, resulting in a tax liability of £4,059. However, HMRC challenged the calculation, on the basis the taxpayer should not have had the benefit of the personal allowance, and calculated the tax liability as £26,818.
The matter was brought to the First Tier Tribunal (FTT) to determine how the relief should correctly be calculated, and the tax that was actually due.
Top Slicing Relief and the Personal Allowance
The full calculation of the relief is outside the scope of this article. However in short, the relief works by allowing the chargeable event gain to reflect the number of years the life policy gain has been earned over.
To facilitate this, a calculation is done where the gain is divided over the number of complete years the policy has been held, and considers the taxpayers notional tax position where a portion of the gain was taxable in each complete year the policy has existed.
Where a taxpayer is entitled to a personal allowance, income within the allowance is not subject to tax. However, the personal allowance is tapered where a taxpayers taxable income exceeds £100,000, and for sufficiently high levels of income, a taxpayer may have no personal allowance available.
In the taxpayers case, their taxable income in the year (including the £110,722 chargeable event gain) was £141,822. Given the level of income, HMRC asserted that the personal allowance was not available, which the FTT agreed was correct.
However, when calculating top slice relief, the computation considers the notional tax position where a relevant (smaller) portion of the gain (“the top slice”) is added to the taxpayers income. In this notional calculation, the taxpayers income was much less than £100,000, and therefore the taxpayer asserted that they would be entitled to a hypothetical personal allowance, for the purposes of calculating the relief. HMRC disputed this interpretation for the reason noted above.
The FTT considered each parties interpretation of the tax rules, and also the original intent of Parliament when enacting top slicing relief. The relief was intended to make the tax liability approximate to what it would have been, had the income been taxed in the years it was actually received i.e. over the lifetime of the policy.
It was decided that the taxpayer was correct in their application of the personal allowance in the top slice relief calculation, and the FTT assessed a tax liability of £4,811 due from the taxpayer (higher than the taxpayers calculation of their liability, but far lower than HMRC’s calculation).
The case evidences that HMRC can err in the calculation of a taxpayers liabilities, and highlights the importance of obtaining professional advice. If you require advice/assistance with your self assessment tax return, or on the application of top slice relief, please contact us.
How much is too much?: The Annual Allowance & Pension Contributions (6 December 2018)