Briefing Notes Tax Chargeable Gain 680 392

Chargeable gains and top-slicing

Find out how chargeable gains are calculated on onshore and offshore bonds.

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 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)
  • 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.

*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 nonsavings 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 I

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 total taxable income for the year and identify how much of the gain falls within the relevant tax bands.
£42,000 + £55,000 = £97,000
No loss of personal allowance. Personal savings allowance reduced to £500

Source Amount Band Rate Tax Due
Employment £12,500 Personal Allowance 0% £0
  £29,500 Basic rate 20% £5,900
Chargeable event gain £500 Personal Savings Allowance 0% £0
  £7,500 Basic rate 20% £1,500
  £47,000 Higher rate 40% £18,800

 

2. Calculate total liability for the year
Tax liability on the gain - £20,300
Less tax treated as paid (£55,000 @ 20% = £11,000)
Total liability £9,300

3. Calculate the annual equivalent
£55,000/11 = £5,000

4. Find the total relieved liability
For the purposes of this calculation, we add the taxpayer’s employment income of £42,000 to the £5,000 annual equivalent of the gain which gives a notional adjusted income of £47,000. As this is less than £100,000, the full personal allowance will be available in this step.

Source Amount Band Rate Tax Due
Employment £12,500 Personal Allowance 0% £0
  £29,500 Basic rate 20% £5,900
Chargeable event gain £500 Personal Savings Allowance 0% £0
  £4,500 Basic rate 20% £900

The total liability on the annual equivalent of the gain is £900. Less tax treated as paid on the annual equivalent - £5,000 @ 20% = £1,000
The total relieved liability is £900 - £1,000 = £0 x 11 years = £0

5. Calculate top slicing relief due
Top slicing relief is the difference between the total liability and the total relieved liability:
Top-Slice relief = £9,300 - £0 = £9,300.

a) International bond
Tax on gain: £20,300
Less top-slice relief: £9,300
= £11,000 income tax to pay on gain

b) UK bond
Tax on gain: £9,300
Less top-slice relief: £9,300
= £0 income tax to pay on gain

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 total taxable income for the year and identify how much of the gain falls within the relevant tax bands.
£33,600 + £91,000 = £124,600
Personal allowance reduced to £200. Personal savings allowance reduced to £500

Source Amount Band Rate Tax Due
Employment £200 Personal Allowance 0% £0
  £33,400 Basic rate 20% £6,680
Chargeable event gain £500 Personal Savings Allowance 0% £0
  £3,600 Basic rate 20% £720
  £86,900 Higher rate 40% £34,760

 

2. Calculate total liability for the year
Tax liability on the gain = £35,480
Less tax treated as paid (£91,000 @ 20% = £18,200)
Total liability = £17,280

3. Calculate the annual equivalent
£91,000/7 = £13,000

4. Find the total relieved liability
For the purposes of this calculation, we add the taxpayer’s employment income of £33,600 to the £13,000 annual equivalent of the gain which gives a notional adjusted income of £46,600. As this is less than £100,000, the full personal allowance will be available in this step.

Source Amount Band Rate Tax Due
Employment £12,500 Personal Allowance 0% £0
  £21,100 Basic rate 20% £4,220
Chargeable event gain £500 Personal Savings Allowance 0% £0
  £12,500 Basic rate 20% £2,500

The total liability on the annual equivalent of the gain is £2,500. Less tax treated as paid on the annual equivalent
- £13,000 @ 20% = £2,600
The total relieved liability is £2,500 minus £2,600 which is £0 x 7 years = £0

5. Calculate top slicing relief due
Top slicing relief is the diff erence between the total liability and the total relieved liability:
Top-Slice relief = £17,280 - £0 = £17,280

a) International bond
Tax on gain: £35,480
Less top-slice relief: £17,280
= £18,200 income tax to pay on gain

b) UK bond

Tax on gain: £17,280
Less top-slice relief: £17,280
= £0 income tax to pay on gain

 

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 total taxable income for the year and identify how much of the gain falls within the relevant tax bands.
£16,500 + £60,000 = £76,500
No loss of Personal allowance. Personal savings allowance reduced to £500

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.

Source Amount Band Rate Tax Due
Employment £12,500 Personal Allowance 0% £0
  £4000 Basic rate 20% £800
Chargeable event gain £1,000 Starting rate

0%

£0
  £500 Personal Savings Allowance 0% £0
  £32,000 Basic rate 20% £6,400
  £26,500 Higher rate 40% £10,600

 

2. Calculate total liability for the year
Tax liability on the gain = £17,000
Less tax treated as paid (£60,000 @ 20% = £12,000)
Total liability = £5,000

3. Calculate the annual equivalent
£60,000/2 = £30,000

4. Find the total relieved liability
Add the taxpayer’s employment income of £16,500 to the £30,000 annual equivalent of the gain which gives a notional adjusted income of £46,500. The full personal allowance will be available in this step.

Source Amount Band Rate Tax Due
Employment £12,500 Personal Allowance 0% £0
  £4,000 Basic rate 20% £800
Chargeable event gain £1,000 Starting rate for Savings 0% £0
  £500 Personal Savings Allowance 0% £0
  £28,500 Basic rate 20% £5,700

The total liability on the annual equivalent of the gain is £5,700
Less tax treated as paid on the annual equivalent - £30,000 @ 20% = £6,000
The total relieved liability is £5,700 - £6,000 which is £0 x 2 years = £0.

5. Calculate top slicing relief due
Top slicing relief is the diff erence between the total liability and the total relieved liability:
Top-Slice relief = £5,000 - £0 = £5,000

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

b) UK bond
Tax on gain: £5,000
Less top-slice relief: £5,000
= £0 income tax to pay on gain

 

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 total taxable income for the year and identify how much of the gain falls within the relevant tax bands.
£36,625 + £229,391 = £266,016
Loss of Personal allowance. Loss of Personal Savings Allowance.

Source Amount Band Rate Tax Due
Employment £37,500 Basic rate 20% £7,500
  £1,125 Higher rate 40% £450
Chargeable event gain £111,375 Higher rate 40% £44,550
  £118,016 Additional rate 45% £53,107

 

 

2. Calculate total liability for the year
Tax liability on the gain = £97,657
Less tax treated as paid (£229,391 @ 20% = £45,878)
Total liability = £51,779

3. Calculate the annual equivalent
£229,391/18 = £12,744

4. Find the total relieved liability
Add the taxpayer’s employment income of £38,625 to the £12,744 annual equivalent of the gain which gives a notional adjusted income of £51,369.

The full personal allowance will be available in this step but still no PSA.

Source Amount Band Rate Tax Due
Employment £12,500 Personal Allowance 0% £0
  £26,125 Basic rate 20% £5,225
Top-slice £11,375 Basic rate 20% £2,275
  £1,369 Higher rate 40% £547

The total liability on the annual equivalent of the gain is £2,822

Less tax treated as paid on the annual equivalent - £12,744 @ 20% = £2,548

The total relieved liability is £2,822 - £2,548 which is £274 x 18 years = £4,932

5. Calculate top slicing relief due
Top slicing relief is the difference between the total liability and the total relieved liability:
Top-Slice relief = £51,779 - £4,932 = £46,847

a) International bond
Tax on gain: £97,657
Less top-slice relief: £46,847
= £50,810 income tax to pay on gain

b) UK bond
Tax on gain: £51,779
Less top-slice relief: £46,847
= £4,932 income tax to pay on gain

 

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.

1. Calculate total taxable income for the year and identify how much of the gain falls within the relevant tax bands.
£3,800 + £52,980 = £56,780
No loss of Personal allowance. Reduction of Personal Savings Allowance to £500.

Source Amount Band Rate Tax Due
Bank interest £3,800 Personal Allowance 0% £0
Chargeable gain £8,700 Personal Allowance 0% £0
  £5,000 Starting rate for Savings Band 0% £0
  £500 Personal Savings Allowance 0% £0
  £32,000 Basic rate 20% £6,400
  £6,780 Higher rate 40% £2,712

 

2. Calculate total liability for the year
Tax liability on the gain = £9,112
Less tax treated as paid
(£52,980 - £8,700* @ 20% = £8,856)
Total liability = £256

3. Calculate the annual equivalent
£52,980/15 = £3,532

4. Find the total relieved liability
Add the taxpayer’s income of £3,800 to the £3,532 annual equivalent of the gain which gives a notional adjusted income of £7,332.

The full personal allowance and reduced PSA of £500 will be available in this step.

Source Amount Band Rate Tax Due
Bank interest £3,800 Personal Allowance 0% £0
Top-Slice £3,532 Personal Allowance 0% £0

The total liability on the annual equivalent of the gain is £0

Less tax treated as paid on the annual equivalent - £3,532 @ 20% = £706

The total relieved liability is £0 - £706 which is £0 x 15 years = £0

 

5. Calculate top slicing relief due
Top slicing relief is the diff erence between the total liability and the total relieved liability:
Top-Slice relief = £256 - £0 = £256

a) International bond
Tax on gain: £9,112
Less top-slice relief: £256
= £8,856 income tax to pay on gain

b) UK bond
Tax on gain: £256
Less top-slice relief: £256
= £0 income tax to pay on gain

* 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 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.