investment bond - top slicing - tax due

Jeremy535897

The view changed over the time of the debate. You will see that the Prudential article was amended again in April 2022. The original view for an offshore bond was as follows:

Salary £32,700
Gain £110,000 5 years so £22,000 per year

Tax on gain with TSR £17,570@ 20% plus £4,430@40% = £5,286 x 5 = £26,430. Add tax paid on salary £32,700 - £12,570@20% = £4,026 giving a total liability of £30,456.

Without TSR Tax on gain £5,000@20% + £105,000@40% = £43,000 plus tax on salary £32,700@ 20% = £6,540 giving a total liability of £49,540 therefore TSR = £19,084


The revised view I think reduces the TSR by £12,570@ 40% = £5,028, so in this example it becomes £11,542. The Prudential example ducks the case of an offshore bond gain taking income over £100,000. I have to say I am not at all sure.

JeffMason

I am just stuck now. I don't understand what the facts are now and don't know whether I can still argue this, or how. 

If they have overcharged me, will it eventually get sorted out and I get a rebate? Or could a mistake like this never be rectified? I don't want to be over charged by £1200 if at all possible...

Does anyone else have a view on this? Should I write back to them and ask for a double check? And if so, what should I cite to make sure they are getting this correct?

My concern with this reply from them, is that they've not looked at the specifics of my case and just thrown a cut and paste letter together. And because I don't know what is right or wrong, I'm stuck as what to do next.

I know that a couple of years earlier I would be correct in what I am querying, but I have no idea what the deal is now, and don't want to keep pushing it if the charges are correct.

JeffMason

Jeremy535897 said:

The view changed over the time of the debate. You will see that the Prudential article was amended again in April 2022. The original view for an offshore bond was as follows:

Salary £32,700
Gain £110,000 5 years so £22,000 per year

Tax on gain with TSR £17,570@ 20% plus £4,430@40% = £5,286 x 5 = £26,430. Add tax paid on salary £32,700 - £12,570@20% = £4,026 giving a total liability of £30,456.

Without TSR Tax on gain £5,000@20% + £105,000@40% = £43,000 plus tax on salary £32,700@ 20% = £6,540 giving a total liability of £49,540 therefore TSR = £19,084


The revised view I think reduces the TSR by £12,570@ 40% = £5,028, so in this example it becomes £11,542. The Prudential example ducks the case of an offshore bond gain taking income over £100,000. I have to say I am not at all sure.

FYI - mine is an onshore bond

Salary - £27,516
Gain - £85,920, 11 years so £7,810 per year

I thought zero tax due, but they are charging me around £1,200 and it's taken them 10 months to get back to me and say that it is correct.

Jeremy535897

The original approach was as follows:

Tax on salary £27,516 - £12,560 (code 1256L) @ 20% = £2,991.20. Assume £60 expenses.
Tax on gain £85,920/11 = £7,811@ 20% = £1,562.20 satisfied by basic rate credit.

Revised approach is:

Total income is £27,516 + £85,920 = £113,436. Personal allowance reduced by £113,436 - £100,000 = £13,436/2 = £6,718 leaving £5,782.
Tax due without top slicing relief:
£27,516 - £5,782 - £60 expenses = £21,674 @ 20 % = £4,334.80
Tax on gain £85,920 is £37,500 - £21,674 = £15,826@ 20% = £3,165.20 +  £70,094 @ 40% = £28,037.60 so total is £31,202.80 less basic rate tax credit £85,920 @ 20% = £17,184.00 ("the individual's liability").
The annual equivalent of the gain is £85,920/11 = £7,811.00
Notional adjusted income is £27,516 - £60 + £7,811 = £35,627. The liability on the £7,811 would be zero as it is covered by the basic rate credit. This means that the whole of the tax of £17,184.00 (the "individual's liability") is relieved, leaving tax due of £4,334.80, but the tax deducted was only £2,991.20, so £1,343.60 is due, being tax on the lost personal allowance of £6,718 at 20%. There is then the small difference of £13.20 referred to earlier, which may have something to do with the expenses.

The experts have changed their view on this over time, and now agree with the approach of HMRC. It seems an unfair approach, as the whole idea of top slicing relief was to treat the gain as arising over the period it was held, and HMRC's approach only partly does that, but short of taking them to a tribunal (and probably losing), there is nothing you can do.

JeffMason

Jeremy535897 said:

The original approach was as follows:

Tax on salary £27,516 - £12,560 (code 1256L) @ 20% = £2,991.20. Assume £60 expenses.
Tax on gain £85,920/11 = £7,811@ 20% = £1,562.20 satisfied by basic rate credit.

Revised approach is:

Total income is £27,516 + £85,920 = £113,436. Personal allowance reduced by £113,436 - £100,000 = £13,436/2 = £6,718 leaving £5,782.
Tax due without top slicing relief:
£27,516 - £5,782 - £60 expenses = £21,674 @ 20 % = £4,334.80
Tax on gain £85,920 is £37,500 - £21,674 = £15,826@ 20% = £3,165.20 +  £70,094 @ 40% = £28,037.60 so total is £31,202.80 less basic rate tax credit £85,920 @ 20% = £17,184.00 ("the individual's liability").
The annual equivalent of the gain is £85,920/11 = £7,811.00
Notional adjusted income is £27,516 - £60 + £7,811 = £35,627. The liability on the £7,811 would be zero as it is covered by the basic rate credit. This means that the whole of the tax of £17,184.00 (the "individual's liability") is relieved, leaving tax due of £4,334.80, but the tax deducted was only £2,991.20, so £1,343.60 is due, being tax on the lost personal allowance of £6,718 at 20%. There is then the small difference of £13.20 referred to earlier, which may have something to do with the expenses.

The experts have changed their view on this over time, and now agree with the approach of HMRC. It seems an unfair approach, as the whole idea of top slicing relief was to treat the gain as arising over the period it was held, and HMRC's approach only partly does that, but short of taking them to a tribunal (and probably losing), there is nothing you can do.

That's incredibly helpful. Thank you so much. 

I agree it is an unfair approach and goes against the whole point of topslicing, which is what is so confusing. But it looks like I'll just need to take the hit.

Can you believe it took them 10 months to reply?  

Jeremy535897

I have no difficulty at all believing it.

JeffMason

Jeremy535897 said:

I have no difficulty at all believing it.

Is this typical then? Or something that has come out of a post pandemic backlog?

Jeremy535897

I am still trying to get a repayment in respect of a marriage allowance claim that was made in February 2020. There is no doubt that the pandemic has made things worse, but HMRC staff numbers have been reduced, and they are sometimes made to work on other things.

[Deleted User]

Jeremy535897 said:

I am still trying to get a repayment in respect of a marriage allowance claim that was made in February 2020. There is no doubt that the pandemic has made things worse, but HMRC staff numbers have been reduced, and they are sometimes made to work on other things.

That’s pretty grim. My wife applied in April 2020 to apply for 2020/21 tax year and my code was changed within four weeks - think I would be following up.

Jeremy535897

[Deleted User] said:

Jeremy535897 said:

I am still trying to get a repayment in respect of a marriage allowance claim that was made in February 2020. There is no doubt that the pandemic has made things worse, but HMRC staff numbers have been reduced, and they are sometimes made to work on other things.

That’s pretty grim. My wife applied in April 2020 to apply for 2020/21 tax year and my code was changed within four weeks - think I would be following up.

The refund for the current and previous year were almost immediate. The further years have been the subject of several phone calls, two letters and a formal complaint in writing. Neither the letters nor the complaint (itself made over 3 months ago) have even been acknowledged.