Tax on chargeable gain

graham47

Jimmo,
Your advice re. this subject:

Newly retired,
Chargeable Event Gains (which are not Capital Gains) are chargeable to tax as an addition to your taxable income and are regarded as the top slice of your taxable income.
Top slicing relief only works for people who would have been liable at basic rate only if they had not realised a Chargeable Event Gain but the Chargeable Event Gain takes them into higher rate.
In words
1) Calculate the full tax due on the Chargeable Event Gain.
2) Divide the Chargeable Event Gain by the number of relevant years
3) Calculate the tax due on that amount
4) Multiply the resultant tax by the number of relevant years. This is often referred to as the Maximum Tax Bill.
5) Top Slicing Relief is the difference between the tax at 1) and the tax at 4).
An example:
In 2006/07 your taxable income, without the Chargeable Event Gain, is £33,150. The ceiling for the basic rate band is £33,300 and so all your income is chargeable at the starting rate or basic rate. In other words, you have not £150 of the available basic rate band.
In that year you realise a Chargeable Event Gain of £1,000.and the number of relevant years is 4.
1) The full tax due on the Chargeable Event Gain is
£150 @ 22% = £33.00
£850 @ 40% = £340.00
Total tax due = £373.00
2) The chargeable Event Gain divided by 4 id £250
3) The tax due on that is
£150 @ 22% = £33.00
£100 @ 40% = £40.00
Total = £73.00
4) Four times that is £292.00
5) Top Slicing Relief is: £373.00 less £292.00 = £81.00.
Hope that helps but if not it would probably be better to deal with your own figures. I am quite happy to do that and there are a number of other posters here who seem to enjoy number crunching........

has left me confused as to the impact on myself.
I have just cashed in part of a Property bond. After speaking to both the bond providers & HMRC my impression was that the total gain was divided by the years held & that it was then this 'gain per year' which was added to that tax years taxable income to see if it took you into the higher rate tax bracket. Am I wrong ?

In the example above you 'tax' £150 of the chargeable (£1000) gain @22% .... surely this has already been payed since any gains are nett of basic rate tax.

The last time I had such an event (several years ago) I cashed in an M&G Investment bond. They sent me a copy of the chargeable event certificate and the following is an extract from an accompanying leter :-

"Top-slicing Relief
Since the gain referred to above may have been made over several years, the gain will be divided by the number of years since the previous gain (or the date of issue of the policy in the case of full encashment .....), and the resultant figure notionally added to your income to determine the rate of tax that will then be charged on the whole gain."

Hope you can clarify this for me.

graham47

Sorry .... No, I'm still unsure.
These are my figures .....

1. Expected "gain per unit" is £1.44
2. Based on the number of units I'm expecting to be sold I estimate a total gain of £29,000.
3. I've held the investment for 5 yrs & have not made any other withdrawals so I calc. 'gain per year' as £5800.
4. I estimate my 2007-2008 taxable income to be £21200, leaving me with £13400 before I hit 40% band at £34600.

So my conclusion was that because my avg. gain over the 5 yrs (£5800) was well below this £13400 and that tax @ 22% had already been deducted from any gains, I wouldn't be liable for further tax at (40-22) i.e. 18%.


Are you telling me I've got this wrong?

dunstonh

Gain is £29,000. Divide that by complete number of years held.
29,0000 /5 = £5800.

Add that £5800 to your income and if it takes you into higher rate you need to do a further calculation for tax purposes. However, if it doesnt take you into higher rate then you have no further tax to pay.

So, you appear to be correct.

note: the calculation for onshore bonds is slightly different to offshore bonds and I have assumed onshore and no withdrawals or previous chargeable events made during the 5 years you held the investment.