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Calculating multiple chargeable gains

If a client is investing a substantial sum in an investment bond, it is often the case that the investment is split between more than one life assurance company.

ican So it is not unexpected that a client may generate more than one chargeable gain in a tax year, for example if they surrender all of their investments across all companies.

In addition, you cannot assume that those companies will be UK life assurance companies as investment bonds can also be issued by non-UK companies, such as those based on the Isle of Man and in Ireland.

It is important, therefore, to be conversant with the chargeable event rules where a client has more than one chargeable gain in any tax year. Where the total gains sit in the same tax band, then tax is payable at that rate, with a credit of 20% given for any gains from UK bonds. However where the total gains put the client into a higher tax band, basic into additional or additional into higher, top-slicing relief may be available.

The steps involved when top-slicing relief applies are:

  1. Calculate the top-sliced gain for each bond.
    For each surrendered policy, divide the gain by the number of years the policy to which the gain relates has been in-force. Then add all the top-sliced gains from the different bonds. Remember to include any previous chargeable gains and any withdrawals that may have been provided during the period of investment.
  2. Add the total top-sliced gains to the client’s income for the tax-year and calculate the tax liability.
    Any gains from UK bonds that are in excess of the basic rate tax band will generate a tax liability. Gains from international bonds can use any available personal allowance, starting rate of income tax and personal savings allowance. Gains in excess of this will generate a basic rate tax liability and a possible liability to higher rates of tax.
  3. Pro-rata the total tax liability across the different bonds being surrendered.
    This will provide the amount of the total chargeable gain attributable to each individual bond.

Example 1

Alexander is surrendering two investment bonds and his earnings for the current tax year are £2,000 below the higher rate tax band. There are no other gains during the tax year.

Bond A
Bond B
Type of bond
UK
UK
Original investment
£100,000
£70,000
Withdrawals
None
None
Surrender value
£120,000
£80,000
Gain
£20,000
£10,000
Years held
5
10

The tax payable under each bond is calculated as follows:

1. Calculate the top-sliced gain for each bond.
  • Bond A = £20,000 ÷ 5 = £4,000.
  • Bond B = £10,000 ÷ 10 = £1,000.
2. Add the total top-sliced gains to the client’s income for the tax-year and calculate the tax liability.
  • The total top-sliced gain for the tax-year is £4,000 + £1,000 = £5,000. As UK bonds, they are deemed to have paid basic rate income tax and £2,000 of the gain is covered by the basic rate tax band. Therefore £3,000 of the top-sliced gain is chargeable at the higher rate of 20%. Additional tax payable on the top-slice is therefore £3,000 x 20% = £600.
3. Pro-rata the total tax liability across the different bonds being surrendered.
  • Total liability x (gain under bond ÷ total gains for tax-year) x number of years held.

    Bond A
    £600 x (£4,000 ÷ £5,000) = £480 x 5 = £2,400

    Bond B
    £600 x (£1,000 ÷ £5,000) = £120 x 10 = £1,200

Alexander has a tax liability of £3,600.

 

Example 2

Ben is surrendering three investment bonds and his earnings for the current tax year are also £2,000 below the higher rate tax band. There are no other gains during the tax-year.

Bond A
Bond B
Bond C
Type of bond
UK
UK
International
Original investment
£100,000
£70,000
£250,000
Withdrawals
Taken as 5% each year
None
£35,000
None
Surrender value
£120,000
£75,000
£270,000
Gain
£20,000
£40,000
£20,000
Years held
5
10
4

The tax payable under each bond is calculated as follows:

1. Calculate the top-sliced gain for each bond.
  • Bond A has a top-sliced gain of
    £20,000 ÷ 5 = £4,000.
  • Bond B has a top-sliced gain of
    £40,000 ÷ 10 = £4,000.
  • Bond C has a top-sliced gain of
    £20,000 ÷ 4 = £5,000.
2. Add the total top-sliced gains to the client’s income for the tax-year and calculate the tax liability.
  • The total top-sliced gain for the tax-year is £4,000 + £4,000 + £5,000 = £13,000.
  • The whole gain under the international bond is chargeable to 20% as there is no tax paid within the bond, therefore the liability is £20,000 x 20% = £4,000.

    The UK bonds are already deemed to have paid basic rate tax.
  • For higher rate tax, £2,000 of the gain is covered by the remainder of the basic rate tax band. Therefore £11,000 of the top-sliced gain is chargeable at the higher rate of 20%. Additional tax payable on the top slice is therefore £11,000 x 20% = £2,200
3. Pro-rata the total tax liability across the different bonds being surrendered.
  • Total liability x (gain under bond ÷ total gains for tax-year) x number of years held.

    Bond A
    £2,200 x (£4,000 ÷ £13,000) x 5 = £3,385

    Bond B
    £2,200 x (£4,000 ÷ £13,000) x 10 = £6,769

    Bond C
    £2,200 x (£5,000 ÷ £13,000) x 4 = £3,385

    In addition to the higher rate tax liability of £13,539, the offshore bond also has a basic rate tax liability of £4,000.

Ben has a tax liability of £17,539 against the chargeable gains. There will be an additional income tax liability if the policy gains before top-slicing when added to his income exceed £100,000. His personal allowance will reduce accordingly.

 

This document is based on Canada Life’s understanding of UK tax legislation as at October 2018 and could be subject to change in the future. We recommend that clients seek their own independent tax advice.

This briefing note is also available as a PDF

This website is for UK professional advisers only and is not approved for use by private customers.

Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Financial Services Authority.

Canada Life International Assurance (Ireland) DAC is authorised and regulated by the Central Bank of Ireland.

Stonehaven UK Limited and MGM Advantage Life Limited, trading as Canada Life, are subsidiaries of The Canada Life Group (U.K.) Limited. Stonehaven UK Ltd is authorised and regulated by the Financial Conduct Authority. MGM Advantage Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority.