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June 24, 2020

Slice Up Your Life Insurance Policy: Top Slice Relief Concession for 2019/20

In the Spring Budget it was announced that new legislation would be introduced to clarify the computation of Top Slicing Relief (TSR) for gains made on or after 11 March 2020. HMRC have since announced that these new rules will apply by concession for all gains arising in the 2019/20 tax year.

What is Top Slicing Relief?

In the absence of TSR, a taxpayer who has historically paid income tax at a lower rate could be catapulted into the higher and/or additional income tax rates on insurance policy gains. This is because whilst the gains accrue over a number of years, they are only subject to income tax in the year of a chargeable event (such as the death of the life assured, or surrender of the bond).

TSR therefore mitigates this higher tax charge by spreading the chargeable gain over the number of years the life policy has been held, thereby effectively putting the taxpayer in the position they would have been if the gain had been taxed annually over the life of the policy.

Whilst the full method for calculating the relief is outside the scope of this article, the amount of the relief available is determined by carrying out a hypothetical tax calculation, and is broadly the difference between the income tax payable on the gain and the income tax payable on the averaged gains over the life of the policy

Top Slicing Relief for 2019/20

Following the ruling in Silver v HMRC (2019) where the taxpayer successfully argued that she was entitled to a personal allowance when calculating the TSR available to her, HMRC has clarified their position in Issue 78 of their Tax Agent Blog.

HMRC have confirmed that for all gains made on or after 11 March 2020, the personal allowance should be reinstated within the calculation for TSR, thereby providing additional relief for taxpayers whose entitlement to the personal allowance had been reduced because the gain was included as part of their income. Where a gain was made in the 2019/20 tax year but before 11 March 2020, this treatment will apply by concession.

Furthermore, HMRC have also stressed that when calculating the TSR, allowances and reliefs must be set as far as possible against other income in preference to the gain.

For 2019/20, an exclusion will be included on the e-filing exclusion list, and taxpayers affected by these rules will receive a correction calculation from HMRC applying the new basis following the submission of their returns.

Related Articles

Any Way You Slice It – Silver v HMRC (Top Slice Relief)

Spring Budget 2020 - Tax Highlights

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