Where individuals realise chargeable event gains on non-qualifying life insurance policies, those gains are subject to income tax at the individual’s marginal rate. As such gains are taxable in a single tax year, but policies are usually held over a much longer period, this can result in tax being charged at a higher rate than would have applied had the gain been taxed equally in each tax year that the policy was held. Top Slicing Relief is intended to mitigate the impact of the gains being charged at a higher rate in these circumstances.
Following a recent First Tier Tribunal case (Silver vs HMRC), the government will legislate to clarify the application of allowances and reliefs in the calculation of Top Slicing Relief. In particular, and in line with the findings of that case, this will allow the taxpayer’s personal allowance to be reinstated in the calculation of Top Slicing Relief where it has been reduced as a result of including their life insurance gain in their total income. The changes will also confirm that allowances and reliefs must be set against other income, rather than the gain, to the full extent possible when calculating the application of Top Slicing Relief.
The measure will affect those making chargeable event gains on non-qualifying life insurance policies who claim Top Slicing Relief on the gains realised.
The measures will apply to all relevant gains arising on or after 11 March 2020.
In our view this measure will give additional clarity to investors in life insurance policies as to the tax treatment they will face on the eventual surrender of, or other chargeable events on, those policies.