Help Please with Top Slicing Calculation

Mothman

Can anyone advise if any Top Slicing Relief would be allowable on the following Chargeable Event Gain from the surrender of an offshore bond:-

Income for tax yr                  £29K

Chargeable Event Gain        £77K (no previous withdrawls)

Bond Full Years                     21

Have spent the afternoon studying lots of online examples regarding taxation of offshore bonds but think I've just ended up confusing myself. I am assuming that as the income and event gain come to more than £100k this will mean the loss of personal allowance, however I'm struggling to work out for certain whether any top slicing relief will be allowable and roughly how much. Hope someone can help, thanks

Jeremy535897

This is a difficult area, but the legislation has been corrected to stop personal allowance being lost in these circumstances. Having said that, the online filing software (HMRC and at least some commercial) continued to give the wrong result for 2020/21, and may do so for 2021/22, despite what is said in this article:
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/chargeable-event-personal-allowance-qa/

The correct result is that top slicing relief should eliminate any tax on the gain as it will all be charged at the basic rate, which is deemed satisfied.

Mothman

Jeremy many thanks for the reply. It really does seem to be a bit of a minefield. Hopefully only basic rate tax will be due on the gain however given the concern about the HMRC online return software, would it be advisable to do a paper return in this instance? 

Jeremy535897

Remember that the basic rate tax liability is treated as settled, so you should have no bill to pay.

I don't know what software you usually use to file online, but I suggest that you wait until its 2021/22 version has been issued, and try it out to see what answer it gives. 

Mothman

Thanks, this will be my first tax return and so I don't currently use any software. Also as it's an offshore bond so my understanding is that no tax is deemed to have being paid thus far.

Jeremy535897

My apologies, I had ignored the word "offshore".

On looking further into this, I am not sure what I said earlier is correct. This article goes into a lot of detail, and it seems that the personal allowance is only restored for the purposes of top slicing relief. See:
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/top-slicing-relief-facts/

Mothman

Thanks for trying anway, much appreciated.

What a nightmare this is, I had read that Pru document previously but just ended up confusing myself. I am now beginning to understand why the IFA concerned was unwilling to offer any tax calculations prior to surrender. I think I will just have to submit a paper return and hope the tax due isn't significantly higher than the basic rate I had planned for. Though the current problem is that I still don't have a Chargeable Event Certificate despite it being 4 months since policy surrender.

Shedman

What was the initial premium paid for the bond and what is its encashment value now?  As you haven't taken any previous withdrawals then you should have the cumulative 5% p.a x 20 (as bond is over 20 years old) of the initial premium that can be taken effectively tax free (its actually tax deferred but generally will be tax free) so the taxable gain may not be as high as you indicate unless that's already been taken into account? 

Don't forget that gains on offshore bonds are taxed as if it is interest income so it can be important to know your earned income, interest received and dividends received separately as you may have some of the Personal Savings Allowance left that will help reduce tax charge. 

I have sent you a PM with some links to Excel calculators that might be useful. I certainly found them helpful.