Chargeable event on death - do we owe tax?

Wurzelgirl

The more I read on this the more confused I get especially as several articles on the web appear to contradict each other so I'm hoping someone out there can advise.

Mum died in January this year and 4 investment bonds became payable to her estate (namely me and my sister as joint beneficiaries - I am acting executor).

The total gain on the bonds was just under £91K and basic rate tax has been paid on all four bonds by the insurers.

Unfortunately HMRC have only just confirmed the self assessment situation up to death which has held up probate. I now need to do probate asap and deal with the chargeable events.

Questions:
1. Mum was a basic rate tax payer in 2017/2018 and did not use up all her basic rate tax band - does this mean we don't have any more income tax to pay?
2. If we do have more income tax to pay due to the gain value, do we pay an extra 20% (i.e. 40% minus 20%) on the whole gain of @£91K or only on the amount over £33500?
3. Again, if tax to pay, can top slicing relief apply
4. If tax to pay, is it just easier to fill in the estate form and just get HMRC to do the calcs (I will put worst scenario figure on probate form as can't hold this up for another 3 months (or 6 if self assessment was anything to go by!!!!))
5. Anything else I should know or be aware of?

Thank you

xylophone

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm28160

Where the policy is a UK life policy, an income tax charge will normally only arise where the deceased was a higher rate taxpayer, or where the gain takes the deceased into the higher rate tax band. Where the personal representatives state that a deduction for tax liabilities relates to a UK life insurance policy of which the deceased was the beneficial owner you should ask them for a copy of the ‘chargeable event certificate’ and you should check that the deceased was a higher rate taxpayer. If not, you should deny the deduction. If the deduction is for higher rate tax, you should establish the additional (higher rate) income tax charged as a result of the death. You should allow the deduction claimed limited to the amount of the additional higher rate tax actually charged. This is because the deceased is treated as having already paid income tax at basic rate - ITTOIA 2005/S530.

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/taxation-uk-investment-bonds/

Where the beneficial owner is also the sole life assured then the policy ends on death. Any chargeable event gain will be that of the deceased person and not that of the personal representatives (although they administer the affairs of the deceased). The gain is therefore assessed as part of the deceased's taxable income for the tax year of death.

The above seems relevant - contact HMRC to check.

Wurzelgirl

For anyone else in this situation, I have just spoken to the HMRC technicians who confirmed that top slicing relief does apply (phew, just saved &£18k tax as adjusted gain doesn't take her into higher rate band) but you need to send a copy of the CE certs to the Self Assessment team to formally advise them - even if You feel there is no extra tax to pay. They can also do calcs for you (had to do myself for probate form). The ref to Pers Reps for deceased for this relief on HMRC site is if the Pers Reps are liable to tax in their own right with connection to the estate, rather than just reporting the deceased's income for self assessment.

Malthusian

Additional tax may apply as she's lost part or all of her Personal Allowance. As she's a basic rate taxpayer and the total gain was £91,000, her total income for the year will have been over £100,000, and she will lose £1 of Personal Allowance for every £2 of excess over £100,000. Top slicing relief doesn't apply in this calculation.

Liketocheckthefacts

I am in a similar situation as executor and have just received a chargeable event certificate from the Pru.on death The gain is £44000 - the bond held for 26 years was backed by life assurance. Basic rate tax is treated as paid on the gain. The whole of the £44000 falls into higher rate at 40%. I have read and re read Guide H320 from the HMRC. Although the bond was held for 26 years Top Slicing Relief is not available. The Guide says ...if you are a trustee or personal rep of a deceased person...……………………….you are not entitled to Top Slicing Relief. The gain has also to be listed for probate purposes and seems liable for IHT also.

Malthusian

If the whole of the gain falls into the higher rate tax band then top slicing is irrelevant anyway.

Bodkin_123

Reply to Liketocheckthefacts

My understanding is that the gain is considered to be received on the day before the date of death. Therefore it was received by the deceased, and not by the personal representatives. You then look at the tax circumstances of the deceased and not the estate. You can therefore apply top-slicing relief if it helps you.

Malthusian

Bodkin_123 wrote: »

You can therefore apply top-slicing relief if it helps you.

No they couldn't, as they said the whole of the gain falls into the higher rate band.

Even though this is a dead thread, this is a common error and I felt it needed correcting.

kidmugsy

Malthusian wrote: »

Top slicing relief doesn't apply in this calculation.

The bustards!

lindabea

Malthusian wrote: »

Top slicing relief doesn't apply in this calculation.

Are you sure? What's special about this calculation? I been trying to understand this top-slicing, and everything I read states that top-slicing is applied when the total gain takes the policy holder above the basic rate of tax. That is the whole purpose of top-slicing; you average out the total gain over the period that the policy had been in force.

Malthusian - Can you please elaborate more on your comment as I'd be very interested to know why you think top-slicing does not apply, especially, as the OP has stated that after checking with HMRC, they confirmed that top-slicing can be applied

lindabea

The following paragraph was taken from a Prudential Investment Bond Guide to Tax.


“Top slicing relief” may reduce the tax liability on any chargeable event gain:
> To work out the profit slice the gain amount is divided by what HMRC refer to as 'Relevant Years' which is:
– on final cashing in – the number of complete policy years that the Bond has been held,
– on withdrawals – the number of complete policy years that the Bond has been held, or
– since the last reported chargeable event gain if less.
The amount of the profit slice is then added to your taxable income. Any part of the profit slice that falls into the Higher Rate
(and the Additional Rate, where applicable) tax bracket is taxable at the difference between Higher/Additional Rate of Income
Tax and the Basic Rate of Income Tax.
The total tax due is calculated by multiplying this amount of tax on the profit slice by the number of Relevant Years.
> Top slicing can reduce your tax liability if none of your taxable income, before the profit slice, would have been subject to tax
above the basic rate, or where the excess gain takes your income into the Additional rate tax bracket.