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.
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. These can be found in HMRC’s Insurance Policyholder Taxation Manual available here:
The steps involved when top-slicing relief applies are:
1. Calculate the total taxable income for the year
Identify how much of the gain falls within the starting rate for savings, personal savings allowance nil rate, basic, higher or additional rate bands as appropriate.
2. Calculate the total tax due on the gains across all tax bands
Include the starting rate for savings and personal savings allowance as appropriate. Deduct basic rate tax treated as paid to find the individual’s liability for the tax year, even for a gain from an international bond.
3. Calculate the ‘annual equivalent’ for each gain
For each surrendered bond, divide its gain by the complete number of years it has been in-force. Then add together all the top-sliced gains from the different bonds.
4. Calculate the total liability to tax on the total annual equivalent
Include the starting rate for savings and personal savings allowance as appropriate. Deduct basic rate tax treated as paid on the total annual equivalent, even for a gain from an international bond.
5. Multiply the result at step 4 by the total gains chargeable to tax in the year, then divide the result by the total annual equivalent at step 3. The result is the total relieved liability.
6. Deduct the total relieved liability at step 5 from the individual’s liability at step 2 to give the amount of top-slicing relief due.
This document is based on Canada Life’s understanding of applicable UK tax legislation and current HM Revenue & Custom’s practice, as at May 2019 and could be subject to change in the future. It is provided for professional advisers only. Any recommendations are the adviser’s sole responsibility.