Top Slicing Relief (TSR) is very important for clients. Calculations can be tricky and involve a five-step procedure, but, on the plus side, TSR can assist clients by reducing the rate of tax charged on Insurance Bond gains by applying a spreading mechanism.
In the Budget of 11 March 2020, measures were announced impacting the calculation. These measures effectively confirmed that HMRC would now accept calculations in line with the First Tier Tax Tribunal case of Silver. In that case, the Tribunal sided with the taxpayer and disagreed with the HMRC approach.
As we know, the personal allowance is gradually withdrawn for clients with adjusted net income above £100,000. The Budget measures allow the personal allowance to be reinstated within Step four of the TSR calculation, where it has been reduced by including a full Bond gain in the client’s income for the year. Step four is where the notional tax due on the slice is calculated. For Step four purposes only, the personal allowance is calculated by reference to the client’s other income and the relevant slice. Previously, HMRC unsuccessfully argued that where the personal allowance had been reduced then that reduced figure was used in the Step four calculation.
The Budget also confirmed that within the TSR calculation, reliefs and allowances must now be set-off, as far as possible, against other income in preference to the gain. This ‘trumped’ pre-existing rules in tax law allowing reliefs and allowances to be set against income in a way that results in the greatest reduction in a client’s income tax liability.
The new measures took effect from the date of the Budget.
That’s fine, but what about those with Bond gains prior to that date?
2018/19 and 2019/20 - now we know
On 20 July, HMRC confirmed to the Chartered Institute of Taxation (CIOT) that the March Budget measures (now included in the Finance Act 2020) will be applied ‘by concession’, to any gains in 2018/19 and 2019/20. This was subsequently confirmed in Agent Update 79
Originally, HMRC had stated it would only be applying the new measures to 2019/20 gains.
HMRC have started an automatic process to identify any taxpayers who filed in 2018/19 and should have benefited from more personal allowance in their TSR calculation. Taxpayers should be contacted directly by HMRC and will receive a revised SA302. HMRC have said that amendments made will only be favourable to taxpayers although the CIOT understands it is possible this new treatment is not always in the taxpayer’s favour.
Any taxpayer in the same position in 2019/20 will need to file a paper return, for HMRC to process manually. From 2020/21, HMRC’s Self-Assessment calculator should produce the right result without the need for manual filing.
2016/17 and 2017/18 - uncertainty remains
These returns are still in time for an overpayment relief claim. If the client had accepted HMRC’s approach at that time, can they now go back and amend the return?
HMRC have reported to the CIOT that where the return is under enquiry because the taxpayer has interpreted the legislation to give a Silver-style calculation rather than accept the HMRC method, they will be taking steps to close these enquiries down. Guidance is awaited for those in the opposite position who followed HMRC’s method but who may now wish to claim a refund.
I mentioned in my opening paragraph that TSR calculations can be tricky. So, it seems can the Self-Assessment filing obligations!