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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15713
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I am normally a basic rate taxpayer, but I have some insurance

Customer Question

I am normally a basic rate taxpayer, but I have some insurance bond chargeable events in the year - the total chargeable events take my income over £100,000 and I lose my personal allowance. My question is on the calculation of the top slicing. When calculating the tax on a slice, my income is well under £100,000, so do I get my personal allowance back for this calculation? Many thanks.
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

I'm afraid that when calculating entitlement to personal allowances, the whole chargeable event gain is used in that calculation, not just the top-slice. Take a look at the fourth paragraph here for confirmation.

I realise this is not good news. Let me know if you have any further questions.
Customer: replied 2 years ago.

This is what HMRC say (but they would, wouldn't they, because it reduces the relief?), and it is how they do their example. But is this what the law says? Many thanks.

Expert:  TonyTax replied 2 years ago.

Not that I needed to as I know how the system works, I've just done a calculation using a third party software (not the HMRC software) and it has included the chargeable event gain in the calculation of entitlement or otherwise to the personal allowance. I can assure you that what is says on the HMRC site is legally sound.

This policy affects pensioners who would normally be entitled to an increased personal allwoance by reason of their age were it not for restrictions based on level of income and chargeable event gains being fully included in the calculation of age allowance entitlement.

I will locate the legislation and give you a link to it.

Expert:  TonyTax replied 2 years ago.
Hi agian.

There are some examples of what is called "adjusted net income" here. Your adjusted net income is what determines your eligibility to the personal allowance and how much of it you are entitled to, if any.

Section 58 Income Tax Act 2007 here defines "adjusted net income". Chapter 9 of Part IV ofIncome Tax (Trading and Other Income) Act 2005 here, section 461 et seq deals with chargeable event gains.
Customer: replied 2 years ago.

Thank you for these links. I have read what I can of the legislation, in particular section 537 of the 2007 Act, and at step 2 the tax on the slices (one slice from each bond) is calculated on the basis that the total chargeable event gains are equal to the sum of these slices. And on this basis, my total income is just over £40,000, and therefore this calculation should give me my full personal allowance (no age allowance of course). The third example at IPTM3850 (HMRC's interpretation of the legislation) does not give the personal allowance on the calculation of the tax on the slice, and I cannot see that the legislation (section 537) gives any grounds for not giving the personal allowance in that part of the calculation. The legislation I am looking for (if it exists) is the bit that says that the tax on the slice (step 2) is calculated using the allowances which are available (or not) as per the tax calculation that includes the total gains from the chargeable events?

Expert:  TonyTax replied 2 years ago.
Can you tell me when the chargeable events occurred please. If they occurred in 2012/13, have you put them into the online tax return for that year. If so, what was the result?

The problem I have is that you never find what you want in the legislation in explicit terms. I will continue to look but I have to say that if you intend to challenge HMRC you will be wasting your time. Would you accept third party websites views on this as I can provide many of those.
Customer: replied 2 years ago.

The chargeable events were in 2012/13, and the software has calculated the top slicing relief as you and HMRC say it should be done. I do appreciate what you say about banging my head against a very thick brick wall but there is a difference of nearly £10,000 (my head is already sore at that, so maybe a brick wall won't hurt it much more). And yes please, I would be interested in any third-party website views which actually mention the basis of the calculation of the tax on the 'slice' (if it is easier for you, then any websites other than HMRC that deal with top slicing on chargeable events, then I can trawl through them between now and the end of January and see what they have to say for themselves). Many thanks.

Expert:  TonyTax replied 2 years ago.
Thanks.

I will post some links in a few minutes.
Expert:  TonyTax replied 2 years ago.
Hi again.

If you look under the heading "Personal allowance trap" here, it says that the whole of the chargeable event gain is included when determining entitlement to the personal allowance. Another confirmation can be found near the bottom of the page here.

You may find the examples here useful in seeing how the top-slice relief is calculated. There are some notes on the HMRC site here and some example calculations here.
Customer: replied 2 years ago.

I am sorry but you seem you have missed the point of my question.


 


I am aware (not happy, but aware) that I get no personal allowance in what I would call the 'main' calculation (total other income plus total chargeable event gains less any available personal allowances [none in my case], then work out the 'full' tax at the relevant rates and then deduct tax taken at source and whatever top slicing relief I can calculate to arrive at my 'net tax due'), because my total income including all the chargeable event gains is well over £100,000.


 


I am not asking for any of the personal allowance in this calculation.


 


It is the 'slice' calculation that I think HMRC has got wrong, because step 2 (both section 536 on single events and section 537 on multiple events) appear to be clear in saying that the total income for this calculation includes only the slice (not the total chargeable gains). And on this basis my income is well under £100,000 and I think I should not lose my personal allowance in this 'slice' calculation.


 


The third-party references you give appear to refer only to the 'main' calculation (which I accept), not to the step 2 'slice' calculation. Am I right in thinking that this is how HMRC do step 2 and therefore everyone is supposed to accept what they say?

Expert:  TonyTax replied 2 years ago.
I don't think I've missed the point. As with many laws, sometimes there are what you might call anomalies. I don't think the top-slice/allowances calculations are contradictory. They are two different things, chalk and cheese if you like. They came about at different times and so were not meant to be complimentary.

The law makers made a conscious decision that the full chargeable event would be deemed to be part of the adjusted net income when determining entitlement to personal allowances when the £100,000 rule was brought in a few years ago. It's been exactly the same for pensioners and age allowance entitlement for many years. The top-slice calculation principles have been around for longer than I have worked in tax which is almost 35 years.

I completely understand why you might think it is illogical that the rules work this way but that is how they do work and until somebody decides differently, there is nothing that can be done I'm afraid.

I have no problem if you don't want to pay for my answers. If that is the case, I'd prefer you not to rate them at all as a poor or bad rating does me no favours and I can assure you that what I've told you is technically sound so a bad or poor rating would be inappropriate in my opinion. If you don't want to pay, then you can just close the question and leave it unrated.

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