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HMRC admits defeat on top slicing - but niggles remain
iStock_Top slice pumpkin_Alena_Ivochkina

Top slicing relief piles up more trouble


HMRC has tweaked the top slicing relief rules that have been applied to the taxpayer’s disadvantage since 2010. But the result is still not fair for some individuals. 

27th Oct 2020
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Top slicing relief (TSR) is used when an individual cashes in non-qualifying life assurance policies (commonly called bonds) to create a chargeable event gain.

Why do we need TSR?

TSR is needed because when a bond matures, a substantial event gain (a lump sum chargeable to income tax) accrues which is all taxable in the year of maturity. Frequently the gain is sufficient to shift the taxpayer’s marginal tax rate from the 20% basic rate to the 40% or even the 45% bands.

However, owing to the structure of these policies, some or even all of the gain may have resulted from earlier “tax-deferred” cash withdrawals from the bond, over anything up to 20 years. If the overall gain had been taxed gradually each year, the policyholder might well have remained at lower marginal tax rates throughout.

TSR was designed to give some relief for this. The idea is that an alternative, hypothetical tax liability should be calculated on the assumption that the gain accrued – and should be taxed – evenly over the years. For example, rather than calculating one year’s tax on a £100,000 gain, we might be computing the tax on twenty gains of £5,000.

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