Calculating top-slice relief 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:

*An “excess event” refers to withdrawals above the 5% allowance and the chargeable gain occurs at the end of the policy year.

**A “full surrender” refers to either the whole bond or individual policies held within the bond.

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

1. Calculate the total taxable income for the year

Identify how much of the gain falls within the SRSB, PSA, 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 2020/21, this means the personal allowance is zero if adjusted net income, including the total gain, £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.

Deduct basic rate tax treated as paid to find the individual’s liability for the tax year.

3. Calculate the annual equivalent of the gain.

The annual equivalent is calculated by dividing the gain by N, this being the number of years the policy has been held or since the last chargeable event.

4. Calculate the individual’s liability to tax on the annual equivalent.

For gains arising on or after 11 March 2020, the personal allowance is recalculated where appropriate by adding the taxpayer’s non-savings/ non-dividend income to the annual equivalent of the gain which gives a notional adjusted income.

If this is less than £100,000, the full personal allowance will be available in this step.

Deduct basic rate tax treated as paid on the annual equivalent and multiply the result by N. This gives the individual’s relieved liability.

5. Calculate the top-slice relief.

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 are based on the 2020/21 tax year and provide the calculations for both UK and international bonds for different client scenarios, following the five steps above.

As of 11 March 2020, HMRC have confirmed that the personal allowance is reinstated and adjusted by reference to the client’s income and top-sliced gain. However, other allowances and reliefs are not recalculated for the purposes of the hypothetical top-slicing relief calculation.

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.


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.


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.


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.


Case Study 5

Low income

Richard only has savings income from his bank account of £3,800 gross
He fully surrenders his investment bond, with a total chargeable gain of £52,980
He has held the investment bond for a total of 15 relevant years.

* tax credit is only applied to “total liability to income tax on income charged to tax” s535 (3) http://www.legislation.gov.uk/ukpga/2005/5/part/4/chapter/9/crossheading/income-tax-treated-as-paid-and-reliefs

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 March 2020. 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.

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

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