In its latest agent update, HMRC outlined its approach to the calculation of top slicing relief (TSR) on chargeable event gains following legislative changes announced at Spring Budget 2020 (11 March 2020). This follows a successful appeal by a taxpayer in the First-tier Tribunal (FTT) (Marina Silver TC7103).

TSR aims to provide relief to taxpayers who become subject to a higher rate of tax as a result of a gain from an insurance policy being included in their income.

Two elements of income tax computations give rise to the differences between HMRC’s interpretation and the position confirmed in the Silver case:

1. Where the personal allowance has been reduced because a gain has been included as income.
2. The ordering of reliefs and allowances in the TSR calculation.

Measures included in Finance Bill 2020, currently going through parliament, will allow reduced personal allowances to be recalculated within the calculation for TSR. This will provide additional relief for taxpayers whose entitlement to the personal allowance has been reduced because a gain has been included as part of their income for the year. It also sets out the order that reliefs should be given.

Assuming the Finance Bill clauses are passed unamended, they will apply to gains arising on or after 11 March 2020, but HMRC has confirmed it will apply the Finance Bill treatment to all gains arising in 2019/20 as a “concessionary treatment”.

The position for tax years prior to 2019/20, however, remains uncertain as the FTT decision is persuasive, but not binding. It is not yet known whether HMRC will continue to reject claims by other taxpayers which would probably lead to a further tribunal case.

The explanatory note to the Finance Bill states that the clauses “put the matter beyond doubt…in line with the original policy intent” which appears to be inconsistent with HMRC arguing for a different approach for previous tax years.

Further detail and worked examples are available in a number of articles by Tim Good for Taxation:

• Calculating top-slicing relief on life assurance gains, 6 May 2020
• Silver wins gold, 2 May 2019
• It’s all gone Pete Tong, 27 September 2017

• Read HMRC’s statement in full in Agent Update 78.
• HMRC updated Insurance Policyholder Taxation Manual (IPTM) pages 3820–3850 on 19 June.
• HMRC updated the technical specifications for 2020 self assessment returns on 5 June 2020 and published the latest versions of the special and exclusion cases.