Investment bonds

Top slicing relief

Top slicing relief can be beneficial in certain circumstances, reducing or eliminating higher or additional rate income tax liabilities on a gain. Note, however, that it cannot have any impact on a basic rate liability, neither will it be of benefit to a client who remains in the same income tax band, both before and after the whole gain is added to their income. Consequently, it will be seen that top slicing relief is relevant only where the amount of the gain, when added to the client’s income, straddles the threshold between two different bands of income tax.

The relief works by dividing the gain by the “top slicing factor.” This is the number of complete years that the policy has been in force from outset (but see example 4 below concerning partial withdrawals exceeding the 5% tax-deferred allowances). That produces a “slice” of gain that is then assessed to income tax, the result then being multiplied by the top slicing factor.
  

Example 1

Eleanor, resident and domiciled in England, is a basic rate taxpayer with an income of £20,000. This includes some savings income, which uses up her personal savings allowance. She had taken out an international investment bond on 1 September 2008 for £100,000 and decides to surrender it fully on 10 October 2018, when the value is £180,000. The gain is therefore £80,000 and, since the bond has been in force for a little over ten years, the top slicing factor is 10 and the slice is £8,000.

Income

£20,000

Gain 

£80,000

Total 

£100,000*

Without top slicing
Assessable @ 20%  £46,350 – £20,000= £26,350  £5,270
Assessable @ 40% £80,000 – £26,350= £53,650  £21,460

Total tax

£26,730

With top slicing
Slice all assessable @ 20%  £8,000 £1,600
Total tax £1,600 x 10  £16,000
Tax saved by top slicing  £26,730 – £16,000 £10,730

 * Note that this will result in the personal savings allowance being reduced to £500

 

Example 2

Billy, resident and domiciled in England, is a basic rate taxpayer with an income of £20,000. This includes some savings income, which uses up his personal savings allowance. He had taken out an international investment bond on 1 September 2008 for £100,000 and decides to take a partial withdrawal of £60,500 on 10 October 2018. The gain occurs at the end of the policy year when there are 11 x 5% allowances, totalling £55,000. The gain is therefore £60,500 – £55,000 = £5,500 and, since the bond has been in force for 11 years, the slice is £500. 

Income

£20,000

Gain 

£5,500

Total 

£25,500

Without top slicing
Assessable @ 20%  £5,500 £1,100

Total tax

£1,100

With top slicing
Slice all assessable @ 20%  £500 £100
Total tax £100 x 11  £1,100
Tax saved by top slicing £1,100 - £1,100 Nil

 

Example 3

Continuing on from example 2, Billy decides to take a further partial withdrawal of £60,500 on 10 October 2019. The gain occurs at the end of the policy year when there are 12 x 5% allowances, but Billy used 11 of them when he took the partial withdrawal on 10 October 2018. The gain is therefore £60,500 – £5,000 = £55,500 and, since the bond has now been in force for 12 years, the slice is £4,625. We will assume Billy’s income for the 2019/20 tax year is the same and the higher rate threshold remains at £46,350.

Income

£20,000

Gain 

£60,500

Total 

£80,500*

Without top slicing

Assessable @ 20%  £46,350 – £20,000= £26,350  £5,270
Assessable @ 40% £60,500 – £26,350 = £34,150 £13,660

Total tax

£18,930

With top slicing

Slice all assessable @ 20%  £4,625 £925
Total tax £925 x 12 £11,100
Tax saved by top slicing  £18,930 – £11,100 £7,830

  * Note that this will result in the personal savings allowance being reduced to £500

Example 4


It is important to note that, in example 3, the top slicing factor is 12 because Billy took out an international bond before 6 April 2013 which he had not varied, assigned or held as a security for a debt after that date. If he had:

• varied it, assigned it or held it as a security for a debt after that date; or

• taken out an international bond on or after that date; or

• taken out a UK bond at any time

the top slicing factor would be calculated from the later of the commencement date of the policy and the date of the latest partial withdrawal in excess of the 5% allowances. If any of these conditions applied to example 3, therefore, the top slicing factor would be only 1, due to the partial withdrawal on 10 October 2018.
It is equally important to note that this rule does NOT apply on full surrender, maturity or death giving rise to benefits. In these cases, the top slicing factor is ALWAYS calculated from outset, even if there has been one
or more previous partial withdrawals in excess of the 5% allowances.

  
This briefing note has been prepared for professional advisers use only. The information regarding taxation is based on our understanding of current legislation, law and HM Revenue & Customs practice as at January 2018. We recommend that advisers and investors take their own professional tax advice.

This briefing note is also available as a PDF.

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