How should we calculate top-slicing relief in light of the recent first tier tribunal, Silver vs HMRC?
Calculating top-slicing relief used to be simple. However, with the introduction of the personal savings allowance and the starting rate band for savings income, calculating the relief has become more complex. Now we have the decision in Silver v HMRC which throws up even more questions.
Mrs Silver surrendered a bond for a gain of £110,721.93, and when this was added to her income of £31,101 she lost her personal allowance, which neither party disputes. However, as the bond had been held for 21 years the top-sliced gain was £5,272.43, meaning that her hypothetical income was below the £100,000 threshold so when calculating the top-sliced relief the court insisted she was entitled to use the full personal allowance.
The surrender of Mrs Silver’s bond was before the introduction of the personal savings allowance and the starting rate band, but the ruling has implications for both. For the personal savings allowance when calculating her actual liability she was a higher rate taxpayer so her entitlement to the personal savings allowance would have been £500.
However, her hypothetical income was within the basic rate band so, in theory, she would have been entitled to a personal savings allowance of £1,000. Likewise if Mrs Silver had held an international bond and had an income of say £8,000, would she be entitled to the £5,000 savings income band? By losing her personal allowance the non-earned income would use up the £5,000 savings band so it would be not available against her actual liability; however, could it be used to calculate the top-slicing relief as the personal allowance would be used against the £8,000 non-earned income, leaving the £5,000 to be used against the top-sliced gain?
Since the ruling we have received confirmation from HMRC that their current interpretation of how top-slicing relief is calculated remains unchanged. It is their view that the personal allowance, personal savings allowance and savings income band 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. However, they caveated that their interpretation has been challenged by a Tribunal and they are currently considering their options, one of which being an appeal to the Upper Tribunal. HMRC has until the 18 June to appeal.
In view of HMRC’s comments, clients and advisers should continue to calculate top-slicing relief based on the current HMRC practice in order to avoid any late penalties and then seek to recover the incorrect tax if how top-slicing relief is calculated changes in the future.
Kim Jarvis is a Technical Manager at Canada Life. She has worked in the life industry arena for over 20 years, with experience in trusts and their taxation, product development, the impact of new legislation on the industry and delivering training. She is an affiliate of the Society of Trusts and Estate Practitioners and a Chartered Insurer.