Yes, triggered by her death and she was both the life assured and beneficial owner
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.
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?
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.
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?
OK. So my original understanding was correct and the top slicing calculation was irrelevant/misleading.
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.
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.
OK. Thanks. If I get a sensible reply I'll let you know. But won't be holding my breath.
Well, my letter is with local MP, suspect will respond at some point. Did the HMRC Technical Office respond?