Life Insurance Bonds – Are You Due A Repayment?

Life Insurance Bonds – Are You Due A Repayment?

The recent victory in the First-Tier Tribunal case, Silver v HM Revenue & Customs (HMRC), has put both tax payers and advisors on notice to review the tax payable when Life Insurance Bonds have been surrendered to identify any available tax repayments.

Historically, when taxing the Chargeable Event Gain (CEG) arising from the surrender of a policy, the additional income that has arisen over a number of years is taxed as the top slice of income received in any one year.  However, an element of relief is available against this additional tax.  Simply put, Top Slicing Relief (TSR) is the difference between the tax on the whole CEG versus the tax on a slice of CEG by reference to the number of years  the policy was held.

The calculations for top slicing are complicated.  HMRC have been using the same method of calculating TSR for many years and software has mirrored their calculation.

The calculation of an individual’s tax has evolved with the introduction of tapering personal allowances.  In recent years the inclusion of dividend and personal saving allowances has also changed how income is taxed and the Silver case has served to highlight a flaw in HMRC’s calculations.

It is believed HMRC are planning to appeal this case to the Upper Tribunal.  However, in the meantime it is recommended that if you have surrendered a Life Policy you check the tax paid and see whether there is an opportunity to claim a tax repayment.

Note – It is worth looking at all tax years from 2010-11 onwards as that is when the tapering of the personal allowance when total income exceeds £100,000 was introduced.

If you need to discuss this further please contact Steve Kings