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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15884
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My mother died recently and had a number of pensions totalling

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My mother died recently and had a number of pensions totalling about £40K/year. She also held some investment bonds that are 34 years old and have made a gain of about £100K over this period and she never took anything out of them. Does this mean that she will lose all personal allowances and effectively pay 40% tax for gain (20% after allowing for the tas treated as already paid)? So is it all treated as if the gain was made in the last year?
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Can you confirm that the payout from the bonds was triggered by your mother's death please. Was she both the life assured and the beneficial owner of the bonds?
Customer: replied 2 years ago.

Yes, triggered by her death and she was both the life assured and beneficial owner

Expert:  TonyTax replied 2 years ago.
Thanks.

Leave this with me while I draft my answer.
Expert:  TonyTax replied 2 years ago.

Hi again.

You should read HS320 as part of this answer.

As your mother was the life assured and the beneficial owner, the chargeable event was triggered by her death and assuming the bonds were non-qualifying bonds (see pages 3, 4 and 5 of HS320) then there will be a chargeable event gain on each bond assessable on your mother for the last tax year of her life.

Each of the certificates will tell you the number of complete policy years which is the figure you use to divide the relevant gain(s) by to arrive at the top-slice. Add all the top-slices together and add the total to your mother's other income for the tax year in which she passed away. Assuming that was in the 2014/15 tax year, the first £41,865 of her income will be covered by the sum of the personal allowance (£10,000) and the 20% tax band (£31,865). Any part of the top-slice which breaches £41,865 will be taxable at 40%.less the 20% tax treated as paid.

If, for example, the top slice is £2,941 (£100,000 / 34) and £1,500 is taxable at 40% then the liability on the whole gain is £10,200 ((£1,500 x 40% - 20%) x 34). The highest the tax can be is £19,998.80 (£2,941 x 40% - 20%).

I hope this helps but let me know if you have any further questions.

Customer: replied 2 years ago.

But since the total income (pension + Gain) is over 100K, all personal allowances will be lost, so she will already be in 40% bracket from pensions, and thus there would be no top slicing available if I understand correctly.But sounds like I must have got this wrong but not clear to me where. Can you clarify?

Expert:  TonyTax replied 2 years ago.
I'll get back to you in a short while.
Expert:  TonyTax replied 2 years ago.

Hi again.

I've just put the income and gains through my tax software and I'm afraid that in the same way that age related allowances are impacted by the full amount of a chargeable event gain as they have been for many years, so is the entitlement to the personal allowance where the total income exceeds £100,000.

Top-slicing relief doesn't apply where a taxpayer's income (excluding a chargeable event gain) takes them into the 40% tax band. The loss of the personal allowance does that as far as your late mother is concerned.

If all the gain is all taxable at 40% which it will be if the pension income to the date your mother died exceeded £31,865, the tax liability will be £20,000 as £20,000 has already been treated as paid at source. The loss of the personal allowance will also impact on the tax liability on the pensions as they will have been paid after taking account of your mother's personal allowance which would have been £10,000 for 2014/15. So, you can expect a liability on the pension income in addition to the liability on the gain.

I hope this clarifies things for you.

TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15884
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
TonyTax and other Tax Specialists are ready to help you
Customer: replied 2 years ago.

So I seem to be right in saying that there is zero mitigation for the fact that the bond gain has taken place over 34 years. This does seem to be particularly onerous, given that if she had taken half the gain in the year before, the tax burden would have been far lower. Is there no way to mitigate this in some way?

Expert:  TonyTax replied 2 years ago.
I'm afraid that as your mother has passed way there is nothing you can do as far as her personal tax position for the year of death is concerned.
Customer: replied 2 years ago.

OK. So my original understanding was correct and the top slicing calculation was irrelevant/misleading.

Expert:  TonyTax replied 2 years ago.
I'm waiting for a call from an HMRC technical section for clarification as I did a calculation on another tax software last evening which gave a different answer with top-slicing relief. You can ask for a refund of your fee if you wish by contacting justanswer customer services.
Expert:  TonyTax replied 2 years ago.
I'm still waiting for a call from HMRC but I found the article here which says that the full chargeable event gain should be included to determine eligibility or not for the personal allowance. The government web page on this does not make specific mention of chargeable event gains.
Customer: replied 2 years ago.

That is my understanding. But this seems to be a particularly nasty tax trap which effectively penalizes for not taking any gains over multiple years, and means that a gain over 34 years causes tax treatment that is the same as if it happened over 1 year. My reason for contacting was that I find it hard to believe that this is intentional (or even morally correct), is there any way that I should be trying to get confirmation of this from HMRC.

Expert:  TonyTax replied 2 years ago.

As I said earlier, I'm waiting for a call from a technical officer at HMRC as I have two tax softwares giving me different answers.

There is a long standing bug in HMRC tax software (all commercial tax sotwares have to mirror the HMRC calculation methods) which they acknowledge exists and which affects some chargeable event gains tax calculations but this would have no effect on your late mother's case.

It is unfair that the gain won't qualify for top-slicing because the whole gain is taken account of for personal allowance purposes but this has long been the case when determining eligibility for age allowance so I can see why the government or rather HMRC took the same line with the £100,000 personal allowance calculations. Certainly, the government website should make it clear.

The government refused to change the rules on child benefit tax rules when an obvious inequity was pointed out to them so bad law does get through I'm afraid.

Given the number of pensioners there are in the UK, it would not surprise me to see a change in the law at some stage in the future but that doesn't help you. All I can suggest is that you write a letter of protest to your MP and the Chancellor of the Exchequer.

Customer: replied 2 years ago.

OK. Thanks. If I get a sensible reply I'll let you know. But won't be holding my breath.

Expert:  TonyTax replied 2 years ago.
The more people complain about this, the better.
Customer: replied 2 years ago.

Well, my letter is with local MP, suspect will respond at some point. Did the HMRC Technical Office respond?

John

Expert:  TonyTax replied 2 years ago.
They haven't as yet but I will be calling again today. I'm sure they will confirm the worst.

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