Tax on a surrendered life policy

[PinkDalek]

He assumes that as HMRC will have a copy of the certificate, they will know if it will result in additional tax liabilites. Not sure if this is the best plan, but presumably if they say he doesn't need to complete one, that's fair enough?

I'll defer to stewamax, who clearly knows more about this area than I do, but previously I assumed top-slicing relief was something that had to be claimed. Now I'm unsure but would there be any merit in sending his copy of the Chargeable Event certificate to HMRC (despite them already probably having a copy), stating he wishes top-slicing relief to be applied (correctly) and see what they say?

... However I'm a bit confused by these exclusions that seem to be causing problems.. Are they likely to be an issue where the only sources of income are one pension and this redeemed policy, plus, perhaps some interest on non ISA savings? I'm picking up that problems occur where this top slicing relief is combined with other reliefs. Is that correct?

Yes, that appears to be the case, as per some of the examples against Exclusion 101.

[k333]

That's a shockingly bad rate of return. So many people got conned into investments like these. All very sad ....

To put this into context, when I sacrificed some redundancy money into my pension in 1997, the pension guy just said "9% pa ... I think we should be able to get that". Not for me - the offer was fixed if I retired at 60, which I didn't manage, but it still turned out to be a good deal.

- K

[staffordian]

He assumes that as HMRC will have a copy of the certificate, they will know if it will result in additional tax liabilites. Not sure if this is the best plan, but presumably if they say he doesn't need to complete one, that's fair enough?

I'll defer to stewamax, who clearly knows more about this area than I do, but previously I assumed top-slicing relief was something that had to be claimed. Now I'm unsure but would there be any merit in sending his copy of the Chargeable Event certificate to HMRC (despite them already probably having a copy), stating he wishes top-slicing relief to be applied (correctly) and see what they say?


Yes, that appears to be the case, as per some of the examples against Exclusion 101.

I think his reasoning is that if HMRC say he need not submit a return, then he is paying no extra tax, therefore top slicing relief is irrelevant.

I shall certainly impress on him that if he becomes liable to higher rate tax, he needs, at the very least, to be aware of the relief!

Thanks again.

Staffordian

[staffordian]

That's a shockingly bad rate of return. So many people got conned into investments like these. All very sad ....

To put this into context, when I sacrificed some redundancy money into my pension in 1997, the pension guy just said "9% pa ... I think we should be able to get that". Not for me - the offer was fixed if I retired at 60, which I didn't manage, but it still turned out to be a good deal.

- K

Yes, I must admit I'd given the rate of return no thought as I was just trying to get a handle on how the tax works on this sort of investment, but I'd be rather miffed at that.

Just shy of 4.5% pa if my quick and dirty maths is any good, and given how relatively high interest rates were for the first few years of the policy, it probably isn't much better than a decent savings account. Not sure if he had an element of life cover in with it though, which would have been worth a few basis points on top of that.

[staffordian]

... I have his figures so will work through it and see how it comes out...

You may find the following useful to check your calculations. It is an excel spreadsheet which you can download free:

http://www.sa2000.co.uk/saol.htm (click ‘Download the Individual tax return software for 2018-19’)

Like your friend, I surrendered a life policy in 2018/19, and I had top-slicing relief. I filled all the details into this spreadsheet and the results matched exactly the calculations on the HMRC self-assessment form.

I've just plugged in a worst case scenario, i.e a pension of £46350, which uses the entire basic rate band, and the data from the insurance redemption certificate.

It shows a liability for higher rate tax of £8671.20, which is a full 40% of the gain.This is entirely eliminated by an allowance. It doesn't specifically say it's top-slicing allowance, but calls it "Allowances and tax credit reliefs", so I guess half is a credit for the 20% tax deducted by the insurance company, and the other half is the top-slicing relief.

So it all looks good

Thanks again to everyone for your invaluable help

Staffordian

[stewamax]

The Workaround states:
The Exclusion no longer applies but in these circumstances a paper return can still be filed if developers have not been able to remove from their products

Tim Good has written to HMRC as follows:

Exclusion 81. It sets an extremely dangerous precedent to allow users of some (errant) but not other software packages to file paper returns on the basis of an error in the developer’s inhouse calculation of tax. The exclusions list should be exclusively for cases where the HMRC calculator is thought to be in error, not where commercial software is in error but the HMRC calculator is correct. At the very least, the errant software developer products should be identified and customers told that the normal late filing penalty will apply if paper returns are filed after 31 October. Alternatively, the exclusion should be removed altogether.

I second Tim Good's view.
Internally, HMRC have two 'fault' lists: #exclusions and #specials.
The #specials list contains mostly HMRC program design and coding faults and provides recommended workarounds for many of them. Third-party SATR calculation program suppliers are allowed to incorporate these workarounds even when HMRC's system doesn't.
But for #exclusions, third-party systems are not allowed to deviate from the tax calculation logic of HMRC's validation suite. So if such a system calculates 'wrongly' when checked against HMRC's validation suite - even if this corrects one or more exclusions - the system needs to be blocked from online submission and users told to revert to paper submission by the October deadline

[Dod101]

That's a shockingly bad rate of return. So many people got conned into investments like these. All very sad ....

To put this into context, when I sacrificed some redundancy money into my pension in 1997, the pension guy just said "9% pa ... I think we should be able to get that". Not for me - the offer was fixed if I retired at 60, which I didn't manage, but it still turned out to be a good deal.

- K

Yes, I must admit I'd given the rate of return no thought as I was just trying to get a handle on how the tax works on this sort of investment, but I'd be rather miffed at that.

Just shy of 4.5% pa if my quick and dirty maths is any good, and given how relatively high interest rates were for the first few years of the policy, it probably isn't much better than a decent savings account. Not sure if he had an element of life cover in with it though, which would have been worth a few basis points on top of that.

It most likely had life insurance as well and contrary to what some seem to think, that costs, even although the son was probably a young life when the policy was taken out. Trouble is that many insurance companies were not very good in what I regard as the old days and I do not think Windsor life was one of the better ones. Anyway that is a side issue.

Dod

[PinkDalek]

... I have his figures so will work through it and see how it comes out...

You may find the following useful to check your calculations. It is an excel spreadsheet which you can download free:

http://www.sa2000.co.uk/saol.htm (click ‘Download the Individual tax return software for 2018-19’)

Like your friend, I surrendered a life policy in 2018/19, and I had top-slicing relief. I filled all the details into this spreadsheet and the results matched exactly the calculations on the HMRC self-assessment form.

I've just plugged in a worst case scenario, i.e a pension of £46350, which uses the entire basic rate band, and the data from the insurance redemption certificate.

It shows a liability for higher rate tax of £8671.20, which is a full 40% of the gain.This is entirely eliminated by an allowance. It doesn't specifically say it's top-slicing allowance, but calls it "Allowances and tax credit reliefs", so I guess half is a credit for the 20% tax deducted by the insurance company, and the other half is the top-slicing relief.

So it all looks good ...

I missed your reply yesterday but do not understand the results you are receiving.

Yes, I would expect the entirety of the Chargeable Event to be fully chargeable at 40% as per the figures you've input. Similarly the notional tax of 20% to be deducted would be correct. Yet, as you have used figures such that there is no remaining basic rate band available in the year in question, there should be no top slicing available, I simply do not understand why the balance of 20% is not payable.

I'll quote stewamax thus:

in the hope that a notification will draw stewamax's attention to this reply of mine!

[staffordian]

I missed your reply yesterday but do not understand the results you are receiving.

Yes, I would expect the entirety of the Chargeable Event to be fully chargeable at 40% as per the figures you've input. Similarly the notional tax of 20% to be deducted would be correct. Yet, as you have used figures such that there is no remaining basic rate band available in the year in question, there should be no top slicing available, I simply do not understand why the balance of 20% is not payable.

I'll quote stewamax thus:

in the hope that a notification will draw stewamax's attention to this reply of mine!

Thanks for spotting something I'd never have picked up on, as I still don't really grasp the principles of top-slicing relief...

From your post, I assume that the relief only kicks in if there is some headroom available within the basic rate band (which I'm pretty sure there would be in practice, as I don't think his pension is anywhere near this - I'd guess nearer £20k give or take a few thousand). But it is strange that the spreadsheet apparently gives a wrong answer, especially as I thought, if anything, given the references above to exceptions working in favour of HMRC, any discrepancy would not be in the tax payer's favour.

Below is the output from the spreadsheet's tax due and summary of income to show what I've entered and what it has produced. I entered the pension as £46350 and tax deducted at source as £8900 which I think is what a taxpayer with a bog standard tax code would have paid...

[staffordian]

Thinking more about this, I have summarised the situation to my friend thus.

Basic rate tax definitely already paid.

If the gain plus pension (and any other income) takes him into the higher tax bracket he might have more to pay and he is now aware that if this is so, some or all of the tax might be offset by top slicing relief.

He will either speak to HMRC or complete a return, so I'm happy to leave it there.

I'm really grateful to all who have taken the time to help. He is having a difficult time at present with a somewhat messy divorce in progress, which is costing him most of his wealth, so the thought of another big chunk of tax was worrying him and he didn't really have the mental energy to deal with it at the moment.

The reassurance you've been able to help with is invaluable.

Thanks again!

[PinkDalek]

I know you say you are happy to leave it there but it has been bugging me overnight and I had started working on this reply (saved in draft before your reply this morning)!

I think I can see what happens (incidentally when you typed tax deducted at source as £8900 in your narrative, you meant £6,900 as per the table but it makes no difference).

Looking at your table it appears that the £500 nil % rate higher rate Personal Savings Allowance (the PSA) is relevant and this is supported by the link I gave earlier at https://www.pruadviser.co.uk/knowledge- ... ief-facts/. The one headed Example of top slicing relief for an onshore bond where they also include Tax @ 0% on £500 (PSA) £0 in the calculations. Presumably part of the Chargeable Event gain is treated as qualifying for the higher rate Personal Savings Allowance (the PSA).

It is the £500 that appears to give rise to the effective lack of additional liability in the example figures you've used. It may not be top-slicing relief per se.

I tried to prove this using the pruadviser example reworked but may have made a mistake here and there - see the Note at the foot. I'll leave it below anyway, merely for the record:

Reworked example of top slicing relief

Pension (after personal allowance) £34,500
Chargeable event gain £22,178

Totals £56,678

Tax @20% on £34,500 = £6,900
Tax @ 0% on £500 (PSA) = £0
Tax @ 40% on £21,678 = £8,671.20

Total liability = £15,571.20

Calculation of Relief

Step one

Taxable income (including the chargeable event gain) is £56,678. The gain falls within the different tax bands as follows:

PSA - £500 @ 0%
Higher Rate Band - £21,678 @ 40%

Step two

The total tax due on the bond gain across all tax bands is £8,671.20

The tax treated as paid on the gain is £22,178 @ 20% = £4,435.60

The individual’s liability for the tax year is therefore £8,671.20 - £4,435.60 = £4,235.60

Step three

The 'annual equivalent' of the gain £22,178 / 28 = £792.

Step four

The 'annual equivalent' + taxable income = £792 + £34,500 = £35,292.

The total tax on the slice is (£500 @ 0%) + (£292 @ 40%) = £116.80

The tax treated as paid on the slice is £792 @ 20% = £158.40 [gives a negative but this for illustration only]

The individual’s tax relieved liability is (£116.80 - £158.40) multiplied by “N”. In this “N” case is 28 years so the tax relieved liability is £1,164.80 [negative but see note at foot]

Step five

Top slicing relief = £4,235.60 + [added not subtracted but see note at foot] £1,164.80 = £5,400.40

Summary

Liability after top-slicing relief is £15,571.20 - £5,400.40 = £10,170.80

The basic rate credit is £22,178 @ 20% = £4,435.60

The overall liability is reduced to £10,170.80 - £4,435.60 = £5,735.20 [I expected £6,900.00 here!]

NOTE: If I hadn't added the £1,164.80 the result would be the £6,900.00, which has in your example been paid at source on the pension income.

[staffordian]

I know you say you are happy to leave it there but it has been bugging me overnight and I had started working on this reply (saved in draft before your reply this morning)!

I think I can see what happens (incidentally when you typed tax deducted at source as £8900 in your narrative, you meant £6,900 as per the table but it makes no difference).

Looking at your table it appears that the £500 nil % rate higher rate Personal Savings Allowance (the PSA) is relevant and this is supported by the link I gave earlier at https://www.pruadviser.co.uk/knowledge- ... ief-facts/. The one headed Example of top slicing relief for an onshore bond where they also include Tax @ 0% on £500 (PSA) £0 in the calculations. Presumably part of the Chargeable Event gain is treated as qualifying for the higher rate Personal Savings Allowance (the PSA).

It is the £500 that appears to give rise to the effective lack of additional liability in the example figures you've used. It may not be top-slicing relief per se.

I tried to prove this using the pruadviser example reworked but may have made a mistake here and there - see the Note at the foot. I'll leave it below anyway, merely for the record:

Reworked example of top slicing relief

Pension (after personal allowance) £34,500
Chargeable event gain £22,178

Totals £56,678

Tax @20% on £34,500 = £6,900
Tax @ 0% on £500 (PSA) = £0
Tax @ 40% on £21,678 = £8,671.20

Total liability = £15,571.20

Calculation of Relief

Step one

Taxable income (including the chargeable event gain) is £56,678. The gain falls within the different tax bands as follows:

PSA - £500 @ 0%
Higher Rate Band - £21,678 @ 40%

Step two

The total tax due on the bond gain across all tax bands is £8,671.20

The tax treated as paid on the gain is £22,178 @ 20% = £4,435.60

The individual’s liability for the tax year is therefore £8,671.20 - £4,435.60 = £4,235.60

Step three

The 'annual equivalent' of the gain £22,178 / 28 = £792.

Step four

The 'annual equivalent' + taxable income = £792 + £34,500 = £35,292.

The total tax on the slice is (£500 @ 0%) + (£292 @ 40%) = £116.80

The tax treated as paid on the slice is £792 @ 20% = £158.40 [gives a negative but this for illustration only]

The individual’s tax relieved liability is (£116.80 - £158.40) multiplied by “N”. In this “N” case is 28 years so the tax relieved liability is £1,164.80 [negative but see note at foot]

Step five

Top slicing relief = £4,235.60 + [added not subtracted but see note at foot] £1,164.80 = £5,400.40

Summary

Liability after top-slicing relief is £15,571.20 - £5,400.40 = £10,170.80

The basic rate credit is £22,178 @ 20% = £4,435.60

The overall liability is reduced to £10,170.80 - £4,435.60 = £5,735.20 [I expected £6,900.00 here!]

NOTE: If I hadn't added the £1,164.80 the result would be the £6,900.00, which has in your example been paid at source on the pension income.

Thanks very much PD, worth far more than a simple rec. Really well explained - even I could follow it And it clarifies in my mind how if all works.

I'm just relieved my tax sitution is usually far simpler!

[stewamax]

I have checked OP’s SATR assessment, including the pension’s tax at source, using the steps outlined in a previous post. With the exception that a negative relieved liability is treated as nil, it appears that the result agrees exactly with PinkDalek’s calculation. But I would guess that it may not agree with HMRC’s since there is still apparently a dispute first raised by Tim Good in Tolley's Taxation Magazine in September 2017 about the calculation of relieved liability (see my notes a., b. and c. appended). The step-wise approach I outlined in a previous approach is close to Tim's own and to the comments made in the Silver tribunal case. Most apposite is Tribunal Judge Mosedale's comment: "So when carrying out the hypothetical tax calculation [for a notional 'slice' year] 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."
[my interpolation]

I hope that with the outcome of the latter, HMRC will bow their heads with a nostra culpa - but I won't be holding my breath.

Code: Select all

Income pre-tax
Pension                 £46,350         
Chargeable event gain   £22,178         
Total                   £68,528      

less
Personal Allowance      £11,850         

Total taxable income    £56,678      


Tax liability
Basic rate              £34,500   @ 20% =   £6,900

Chargeable event gain
Starting rate               £0      @ 0% =   £0
Basic rate band at nil rate £0      @ 0% =   £0
Basic rate                  £0      @ 20% =  £0
HR band at nil rate       £500      @ 0% =   £0
HR                     £21,678      @ 40% =  £8,671.20

Tax chargeable                            £15,571.20

less Top Slicing Relief                   £4,235.60*
less notional tax from chargeable event   £4,435.60

Tax due after reliefs and allowances      £6,900
Less tax deducted at source for pension   £6,900
Net tax due                                 £0


* would be £5399 if the negative relieved liability of £1164 were included. Treated here as zero.

Note that a pension of £46,350 precludes claiming the starting rate for savings allowance.

a. HMRC’s position – until the Silver tribunal outcome at least – was that in spite of legislation [section 535 Income Tax (Trading and Other Income) Act 2005] not stating specifically that top-slicing relief should only apply to those taxpayers who straddle higher tax bands (and not that the calculations in it should be applied to all taxpayers), this is how HMRC wish to interpret it: i.e. unless a taxpayer’s income is lifted from BRT to HRT as a result of the chargeable gain, then HMRC maintains that top-slicing relief simply does not apply.

b. Further, HMRC maintain that when calculating the relieved liability on the annual equivalent (one slice), allowances such as starting rate for savings or personal savings allowance must be those used in the main tax calculation (the one containing the full chargeable gain and full notional tax paid) and not those that would obtain in any one of the notional ‘slice’ years. This means that if in a notional slice year the overall tax liability was reduced from HRT to BRT (as it typically would if other income was relatively modest and, in the main tax calculation, taxpayer was only catapulted into HRT by the gain) AND because the notional slice year is now BRT other allowances (e.g. starting rate for savings or personal savings allowance) were larger in consequence, the new larger allowances must not be used when calculating relieved liability – only the smaller allowances from the main tax calculation.

c. Exclusion #81 correctly pinpointed that, when calculating reliefs available against a chargeable gain, the starting rate for savings and personal savings allowance should have been included in the HMRC SATR calculator for 2017-18 and are supposedly fixed for 2018-19. But, like Whack the Mole, two new related exclusions have now arisen: #101 and #102.
Note that this is not the same problem as b. above, which applies to a notional sliced year and not the main tax calculation.