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Top slicing changes

As announced in the Budget 2020, new legislation has been introduced to clarify the top slicing calculation for gains made on or after 11 March 2020. The new legislation confirms:

  1. For the purpose of the top slicing calculation reliefs and allowances are to be set against other income as a priority. Only if there are allowances remaining are they to be set against the chargeable event gain(s)
  2. When assessing the tax due on the annual equivalent (the gain(s) divided by the years made over) the availability of the personal allowance should be assessed using the annual equivalent not the full gain(s).

The case which has prompted this change – Marina Silver v HMRC - involves a disagreement in whether Marina Silver had the personal allowance available for the purposes of the top slicing relief calculation. Marina Silver argued it should be available whereas HMRC argued it shouldn’t because total income, including the full gain, exceeded £121,200 (2015/16 tax year) removing the allowance in full.

The new legislation clears this up for gains that occur on or after 11 March 2020. A before (based on pre-budget HMRC guidance) and after (Budget 2020) position is given as an example below:

Gain - £110,000 made over 21 years

Other income – £35,000

The top slicing relief calculation based on HMRC guidance before 11 March 2020 would look like this:

Tax on full gain

Total liability above basic rate credit

Gain(s) in bands

Tax

Personal allowance

£0

£0

Starting rate for savings

£0

£0

Personal savings allowance

£500

£0

Basic rate

£2,000

£400

Higher rate

£107,500

£43,000

Additional rate

£0

£0

Total tax on Onshore gain(s)

 

£43,400

Onshore credit**

 

£22,000

Total liability on Onshore gain(s)

 

£21,400

Total liability (onshore & offshore)

 

£21,400

Tax on annual equivalent

Relieved liability above basic rate credit

Gain(s) in bands

Tax

Personal allowance

£0

£0

Starting rate for savings

£0

£0

Personal savings allowance

£500

£0

Basic rate

£2,000

£400

Higher rate

£2,738

£1,095

Additional rate

£0

£0

Total tax due on slice

 

£1,495

Tax credit**

 

£1,048

Total liability on slice

 

£448

Total relieved liability (total liability on slice x average years)

 

£9,400

Top slicing relief would be the difference (£21,400 - £9,400) £12,000. As there is no personal allowance, the income of £35,000 leaves only £2,500 available for the annual equivalent.

The same example following the Budget 2020 for gains on or after 11 March 2020 would provide a very different outcome:

Tax on full gain - would look the same

Total liability above basic rate credit

Gain(s) in bands

Tax

Personal allowance

£0

£0

Starting rate for savings

£0

£0

Personal savings allowance

£500

£0

Basic rate

£2,000

£400

Higher rate

£107,500

£43,000

Additional rate

£0

£0

Total tax on Onshore gain(s)

 

£43,400

Onshore credit**

 

£22,000

Total liability on Onshore gain(s)

 

£21,400

Total liability (onshore & offshore)

 

£21,400

Tax on the annual equivalent - would be lower as the personal allowance is available in full

Relieved liability above basic rate credit

Gain(s) in bands

Tax

Personal allowance

£0

£0

Starting rate for savings

£0

£0

Personal savings allowance

£500

£0

Basic rate

£4,738

£947

Higher rate

£0

£0

Additional rate

£0

£0

Total tax due on slice

 

£947

Tax credit**

 

£1,048

Total liability on slice

 

£0

Total relieved liability (total liability on slice x average years)

 

£0


Top slicing relief would be the difference (£21,400 - £0) £21,400. As £12,500 of the other income falls within personal allowance, the remaining basic rate band after other income is £15,000. The annual equivalent therefore easily falls within this.

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