HMRC internal manual

Insurance Policyholder Taxation Manual

Top slicing relief: calculation

You should check the other guidance available on GOV.UK from HMRC as Brexit updates to those pages are being prioritised before manuals.

Chargeable event gains are treated as the top slice of total income.  Where an individual has more than one gain assessable for the same tax year, the gains are aggregated.  Any losses are not offset as part of this aggregation process directly.  However, if a policy has given rise to deficiency relief for that tax year – see IPTM3860 – the relief is deducted in calculating the aggregate.

For the purpose of determining total income, income arising from the following items is ignored:

  • premiums on leases
  • employment termination payments.

The key to the calculation is to determine a fraction of the gain, or aggregated gains, by dividing it by_ _‘N’, where this is the number of complete years, ending with the date of the chargeable event and starting with a date determined as set out below.

Changes to the time apportioned reduction rules (see IPTM3731), to reflect the introduction of the statutory residence test, apply to all policies where the gain arises on or after 6 April 2013.  This will affect the period used for N.

Excess Events other than Final Events

UK Policies

Pre 6 April 2013 policies

  • The starting point for determining N is the later of commencement or the date of the last excess event (see IPTM3555).

Policies issued or varied on or after 6 April 2013

  • Where the policyholder has always been UK resident, time apportionment reduction (TAR) will not apply.  The period for N is the later of commencement or the last excess event.
  • Where the policyholder has a period of non-residence, TAR will apply.  The period for N starts from the later of the commencement of the policy, or the date of the last excess event, and is reduced by any period of residence overseas.

 

Offshore Policies

Pre 6 April 2013 policies

  • The starting point for determining N is the commencement of the policy.

Policies issued or varied on or after 6 April 2013

  • Where the policyholder has always been UK resident, time apportionment reduction (TAR) will not apply.  The period for N is the later of commencement or the last excess event.
  • Where the policyholder has a period of non-residence, TAR will apply.  The period for N starts from the later of the commencement of the policy, or the date of the last excess event, and is reduced by any period of residence overseas.

Example 1

Orla purchased a life insurance policy from a UK insurer on 1 April 2014 when she was UK resident.  From 1 April 2015 Orla was resident for tax purposes in the Republic of Ireland before returning permanently to the UK on 31 March 2017.

On 1 August 2018, Orla partially surrendered her policy and incurred a chargeable event gain.  The gain will be deemed to have occurred at the end of the relevant insurance year, in this case 31 March 2019. 

The period for N starts from the commencement of the policy less any period of non-residence.  N is therefore the 5 years from commencement of the policy less the 2 year period of non-residence.

 

Final Events: Death, Maturity and Full Surrenders

Where the event in question is a final event, where the whole of the rights under the policy or contract are surrendered, N is calculated as follows:

UK Policies

Pre 6 April 2013 policies:

  • Where the event is a final event such as full surrender, maturity or death, the starting point for determining N is the commencement date of the policy.

Policies issued on or after 6 April 2013

  • The starting point for determining N is the commencement date of the policy, but where TAR applies, N is reduced by any period of residence overseas.

Offshore Policies

For all policies, the starting point for determining N is the commencement date of the policy, but where TAR applies, N is reduced by any period of residence overseas.

Example 2

The relevant facts are as in Example 1. 

Orla has continued to reside permanently int the UK since 31 March 2017.  Orla surrenders her life insurance policy in full on 31 March 2022.

As this is a final event, the period for N starts from commencement of the policy, less any period of non-residence.  N is therefore the 8 years since commencement of the policy less the 2 year period of non-residence.

 

The use of the fraction is explained at IPTM3840.

N cannot be reduced, in any of the above circumstances, to less than 1. 

No top slicing relief is available for the annual gains that arise on ‘personal portfolio bond events’, see IPTM3650.  Where such a gain arises, the ‘number of complete years’ entered on the tax return should be 1 to ensure that in practice no top slicing relief is given on the gain.  This is the figure that should have been shown by the insurer on the chargeable event certificate – see IPTM7165 and IPTM7130

Basic rate tax treated as paid – Offshore policies

Foreign policies do not attract a credit for tax treated as paid (see IPTM3720).  However, for the purposes of calculating top slicing relief basic rate tax treated as paid is deducted from both the total liability and total relieved liability within the calculation [see IPTM3840] This ensures that the relief is calculated in the same way for all policyholders, regardless of whether the policy is a ‘UK’ policy or ‘foreign’ policy.  IPTM3850 sets out examples of how this works in practice.