UHY Ross Brooke Chartered Accountants

Might you have paid too much tax?

tax law top slicing relief

HMRC has lost a recent case in respect of how it calculates the tax due on life assurance gains- the profits accrued over many years of owning a life assurance investment policy, which is later encashed.

It was always understood, by tax advisers and financial advisers alike, that a relief, called ‘top-slicing relief’, was available to reduce the tax on any long term gain as if the income had accrued in slices over the number of years the policy was held.

However, changes in tax legislation have not been adjusted for in the explanation of how the top-slicing calculation is now designed to operate leading to a dispute over whether the savings allowance and the personal allowance should always be taken into account in working out the tax on a ‘slice’. Needless to say, HMRC takes the least favourable computation- but the legislation in this area does not appear to support this, nor does the policy behind the relief.

As tax software is built using HMRC taxonomy, many advisers will be unaware of the issue and will follow what their trusted systems produce.

The case could have a substantial impact on many taxpayers who encashed life assurance policies over the last four years, with potential for overpayment relief claims to be made. It is arguable that some issues could go back further and that Extra-Statutory Concessionary treatment ought to be granted by HMRC to relieve the taxpayer of the incorrectly computed liabilities.

Our Tax Director, Phil Kinzett-Evans, recently advised a client whom he believed would have no tax to pay on encashment of their policy(ies). Whereas, HMRC’s calculator gave an astonishing £54,000 liability. He discussed this with a fellow prominent adviser, who has been keen to highlight this area in technical publications, and his computations agreed Phil’s approach.

The Silver case has been given leave to Appeal to the Upper Tribunal and we are following it closely to see whether this bears any fruit for the taxpayer concerned and ultimately then whether we can assist others who may well have overpaid significant amounts of tax under HMRC’s methodology.

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