Top slicing relief – latest developments

Those of you who deal with insurance bond encashments will know the legislation is extremely complex.  If you read the provisions without giving up, you will see that a valuable relief, known as ‘top slicing relief’ can help mitigate higher or additional rates of tax that would otherwise arise on the bond encashment. Exactly how this relief applies is outside the scope of this tax-bite but essentially it applies where the calculation under top-slicing would result in a lower tax rate applying to the gain.

The relief treats the gain arising in the tax year of encashment as if it arose over the lifetime of the bond’s existence.  If this means the gain would be taxed at a lower rate, compared to the rate if it was all assessed in the year of encashment, tax relief is given.

A recent case has highlighted our view of how this relief should interact with the personal allowance, which contradicts with HMRC’s view as set out in its manuals.

Consider the example below:

A client encashes a life policy in 2019/20 which has been held for 10 years on which a gain of £100,000 arises. He has other income of £30,000 so this encashment would mean most of the chargeable event gain would be assessable at 40% rates of tax. Also, because his income exceeds the £125,000 limit, he would attract no personal allowance.

Using top slicing relief, the gain is divided by the number of years the policy has been held to create a one-year annualised value of the gain, i.e. a ‘slice’.   In this case, the slice is £10,000 (£100,000/10 years).  When added to his other income (£40,000 total) this means the whole gain would be subject to basic rates of tax, meaning the top slicing relief rules will apply. Not only that, it should mean that his personal allowance is not restricted as his income nowhere near the £125,000 restriction point.

HMRC’s view, however, is that a personal allowance should not be available in this example because the taxpayer would not be entitled to this when looking at the total income for the tax year in question. Their view is the annualisation is a deeming provision only.

Tax advisers, us included, have challenged HMRC’s interpretation which does not accord with the prescriptive methodology set out in the legislation.  The legislation includes detailed steps of how to calculate the hypothetical tax due on a slice of the gain, making no reference to allowances being denied.


Latest developments – the case

To date HMRC has resisted all challenges to its interpretation of the legislation.  However, this week a decision made in a first-tier tribunal case, Marina Silver v HMRC Commissioners, has found in favour of the taxpayer.  The tribunal judge agreed with our view that a personal allowance should be taken into account in calculating the relief and stated that this is not only in accordance with the wording of the legislation in ITTOIA 2005, but is also reflective of the intent of the intent of Parliament:

Parliament’s intent with top slicing relief was obviously to allow a person who has taken income over a number of years to have relief when provisions taxed them to the entire income in a single year, as here. The relief was intended to make the tax liability approximate to what it would have been had the income been taxed in the year it was actually received. So when carrying out the hypothetical tax calculation it made every kind of sense that the taxpayer should be treated as entitled to the reliefs that that hypothetical income would have entitled her to.”

This is a very encouraging decision. Although HMRC may appeal, we will continue to ensure any top slicing relief claims include the personal allowance where relevant, in accordance with the provisions of ITTOIA 2005.




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