Calculating tax on a chargeable gain

This briefing note has been designed to help you understand how chargeable gains are calculated on both UK and international bonds held by individuals.

Individual taxpayers may suffer extra tax by being charged in a single year on gains that have accrued over a period of time.

Top-slicing relief may assist. It allows chargeable gains to be divided by the number of complete years the bond has been in force to recognise the fact that the chargeable gain has accrued over the whole period for which the bond was in force and not merely in the tax year in which tax is to be assessed on the chargeable gain.

Top-slicing relief may still be of benefit even if the chargeable gain does not move the taxpayer into a higher rate tax bracket due to the effect of the personal savings allowance and the starting rate for savings band.

Points to remember

  • Gains made under investment bonds, whether UK or international, are classed as savings income.
  • Top-slicing is a tax relief and, in some circumstances, can be used to reduce or eliminate the liability to higher and/or additional rate income tax when a chargeable gain arises.
  • Gains can be used, in some circumstances, against any unused:
    • personal allowance
    • starting rate for savings band (SRSB) of up to £5,000 depending on other income
    • personal savings allowance (PSA) of up to £1,000 depending on income tax band
  • The personal allowance must first be used against non-savings income but then any excess can be allocated to other income in such a way that it results in the least tax being payable (s25 ITA 2007)
  • The amount of tax that can be relieved under the top-slicing calculations for both UK and international bonds, has always been restricted by basic rate tax (S530 ITTOIA 2005)
  • HMRC states that top-slicing calculations must use the same allocations of the personal allowance, SRSB and PSA that were given to the usual tax calculations. For example, if the PSA is reduced because the chargeable gain puts the policyholder into the higher rate tax bracket, this reduced allowance is used for the purposes of the top-slicing calculations.
  • Top-slicing is not available to trustees or personal representatives. Where trustees are assessed for a chargeable gain, they will have an allowance of up to £1,000 at 20% and 45% on the balance.
  • When terminating a bond, the number of complete relevant years is always back to the start of the bond. Where an excess withdrawal has been taken, this can change. Please see the flow chart on the next page.
  • For more than one chargeable gain in the same tax year over multiple policies, the gains are aggregated. Please refer to our Briefing Note on Calculating multiple chargeable gains.

How to calculate the correct number of complete relevant years:

Five steps to help calculate the tax on a chargeable gain:

1. Calculate the total taxable income for the year for non-savings non-dividend income, savings income and dividend income.

Calculate how much of the gain falls within the SRSB, PSA and basic, higher or additional rate bands as appropriate.

Remember, if an individual’s adjusted net income exceeds £100,000 tapering of the personal allowance will apply at £1 for every £2 in excess of the £100,000 limit. For the tax year 2019/20, this means the personal allowance is zero if adjusted net income, including the total gain, is £125,000 or above.

The SRSB of £5,000 is reduced by £1 for every £1 of non-savings income above the personal allowance.

The PSA is applied to the first £1,000 of savings income for basic rate taxpayers and the first £500 for higher rate taxpayers. Additional taxpayers do not benefit from the PSA.

2. Calculate the total tax due on the gain across all tax bands.

For both UK and international bonds deduct basic rate tax treated as paid to find the individual’s liability for the tax year.

3. Calculate the annual equivalent, or top-slice, of the gain.

Calculate how much falls within the SRSB, PSA, and basic, higher or additional rate bands as appropriate. Divide the gain by the number of complete relevant years.

4. Calculate the individual’s liability to tax on the top-slice.

For both UK and international bonds deduct basic rate tax treated as paid on the annual equivalent and multiply the result by the number of complete relevant years. This gives the individual’s relieved liability.

5. Calculate the top-slice relief due and the total income tax after top-slice relief applied.

Deduct the individual’s relieved liability at step 4 from the individual’s liability at step 2 to give the amount of top-slicing relief due.

Case Studies

The following case studies have been agreed by HMRC. They are based on the 2019/20 tax year and provide the calculations for both UK and international bonds for different client scenarios, following the five steps above.

HMRC’s current interpretation of how top-slicing relief is calculated remains unchanged. It is their view that the personal allowance and PSA are not recalculated for the purposes of the hypothetical top-slicing relief computation as these allowances are based on actual income received in the year, with the caveat that their interpretation has recently been challenged by a Tribunal and so they are currently considering their next steps.

Case Study 1

Gain moves client into higher tax bracket

Monica has earned income of £42,000 gross She fully surrenders her investment bond, with a total chargeable gain of £55,000 She has held the investment bond for a total of 11 relevant years.

1. Calculate the total taxable income for the year for non-savings non-dividend income, savings income and dividend income. Check for any loss of personal allowance.
£42,000 + £55,000 = £97,000
No loss to personal allowance.

Calculate the total taxable income:

2. Calculate the total tax due on the gain across all tax bands and deduct basic rate tax.
Total tax on gain = £20,300
£20,300 less 20% credit
(£55,000 @ 20% = £11,000)
£20,300 - £11,000 = £9,300

3. Calculate the annual equivalent or top-slice of the gain.
£55,000 / 11 = £5,000

4. Calculate the individual’s liability to tax on the top-slice.
£500 (PSA) @ 0% = £0
£4,500 @ 20% = £900
Total = £900
Tax credit = £5,000 @ 20% = £1,000

Total relieved liability on top-slice: (£900 - £1,000) = £0 x 11 = £0

5. Calculate the top-slice relief due and the total income tax after top-slice relief applied.

Top-slice relief = £9,300 - £0 = £9,300

a) International bond
Tax on earned income: £5,900
+ total tax on gain: £20,300
Less top-slice relief: £9,300
= £16,900 total income tax to pay

b) UK bond
Tax on earned income: £5,900
+ total tax on gain: £9,300
Less top-slice relief: £9,300
= £5,900 total income tax to pay


Case Study 2

Personal Allowance affected by gain

Janice has earned income of £33,600
She fully surrenders her investment bond, with a total chargeable gain of £91,000
She has held the investment bond for a total of 7 relevant years.

1. Calculate the total taxable income for the year for non-savings non-dividend income, savings income and
dividend income. Check for any loss of personal allowance.
£33,600 + £91,000 = £124,600
Personal allowance reduced to £200.

Calculate the total taxable income:

2. Calculate the total tax due on the gain across
all tax bands and deduct basic rate tax.
Total tax on gain = £35,480
£35,480 less 20% credit on UK bond
= (£91,000 @ 20% = £18,200)
£35,480 - £18,200 = £17,280

3. Calculate the annual equivalent or top-slice
of the gain.
£91,000 / 7 = £13,000

4. Calculate the individual’s liability to tax on
the top-slice.
£500 (PSA) @ 0% = £0
£3,600 @ 20% = £720
£8,900 @ 40% = £3,560
Total = £4,280
Tax credit = £13,000 @ 20% = £2,600

Relieved liability on top-slice: (£4,280 - £2,600)
= £1,680 x 7 = £11,760

5. Calculate the top-slice relief due and the total
income tax after top-slice relief applied.

Top-Slice Relief = £17,280 – 11,760 = £5,520

a) International bond
Tax on earned income: £6,680
+ total tax on gain: £35,480
Less top slice relief: £5,520
= £36,640 total income tax to pay

b) UK bond
Tax on earned income: £6,680
+ total tax on gain: £17,280
Less top slice relief: £5.520
= £18,440 total income tax to pay


Case Study 3

Client has starting rate for savings band available

Phoebe has earned income of £16,500 gross
She fully surrenders her investment bond, with a total chargeable gain of £60,000
She has held the investment bond for a total of 2 relevant years.

1. Calculate the total taxable income for the year for non-savings non-dividend income, savings income and
dividend income. Check for any loss of personal allowance.
£16,500 + £60,000 = £76,500
No loss to personal allowance.

Calculate the total taxable income:

The £5,000 starting rate for savings band is reduced by £1 for every £1 of non-savings or earned income above the personal allowance and is used against the savings income. In this case £16,500 – £12,500 = £4,000 which leaves £1,000 of the starting rate available.

2. Calculate the total tax due on the gain across all tax bands and deduct basic rate tax.
Total tax on gain = £17,000
£17,000 less 20% credit
(£60,000 @ 20%= £12,000)
£17,000 - £12,000 = £5,000

3. Calculate the annual equivalent or top-slice of
the gain.
£60,000 / 2 = £30,000

4. Calculate the individual’s liability to tax on the
top-slice.
£1,000 (SRSB) @ 0% = £0
£500 (PSA) @ 0% = £0
£28,500 @ 20% = £5,700
Total = £5,700
Tax credit = £30,000 @ 20% = £6,000

Total relieved liability on top-slice:
(£5,700 - £6,000) = £0 x 2 = £0

5. Calculate the top-slice relief due and the total income tax after top-slice relief applied.

Top-slice relief = £5,000 - £0 = £5,000

a) International bond
Tax on earned income: £800
+ total tax on gain: £17,000
Less top-slice relief: £5,000
= £12,800 total income tax to pay

b) UK bond
Tax on earned income: £800
+ total tax on gain: £5,000
Less top-slice relief: £5,000
= £800 total income tax to pay


Case Study 4

Client loses all allowances and moves into higher tax bracket

Chandler has earned income of £38,625 gross
He fully surrenders his investment bond, with a total chargeable gain of £229,391
He has held the investment bond for a total of 18 relevant years.

1. Calculate the total taxable income for the year for non-savings non-dividend income, savings income and
dividend income. Check for any loss of personal allowance.
£36,625 + £229,391 = £266,016
Loss of personal allowance and personal savings allowance.

Calculate the total taxable income:

2. Calculate the total tax due on the gain across
all tax bands and deduct basic rate tax.
Total tax on gain = £97,657
£97,657 less 20% credit
(£229,391 @ 20% = £45,878)
£97,657 - £45,878 = £51,779

3. Calculate the annual equivalent or top-slice
of the gain.
£229,391 / 18 = £12,744

4. Calculate the individual’s liability to tax on the
top-slice.
£12,744 @ 40% = £5,098
Total = £5,098
Tax credit = £12,744 @ 20% = £2,549

Relieved liability on top-slice: (£5,098 - £2,549)
= £2,549 x 18 = £45,882

5. Calculate the top-slice relief due and the total
income tax after top-slice relief applied.

Top-slice relief = £51,779 - £45,882 = £5,897

a) International bond
Tax on earned income: £7,950
+ total tax on gain: £97,657
Less top-slice relief: £5,897
= £99,710 total income tax to pay

b) UK bond
Tax on earned income: £7,950
+ total tax on gain: £51,779
Less top-slice relief: £5,897
= £53,832 total income tax to pay

This briefing note is also available as a PDF

This document is based on Canada Life’s understanding of applicable legislation, law and current HM Revenue & Customs practice as at May 2019. The information regarding taxation is based on our understanding of current legislation, which may be altered and depends upon the individual circumstances of the investor. We recommend that investors seek their own professional advice.

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