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Multiple chargeable events on multiple and single policies ending in the same tax year

A client may need to fully or partially encash their investment bond(s) (onshore  & offshore) at different times within one tax year creating a series of gains. How these bonds are encashed can determine any chargeable gains realised within that tax year and the calculations for tax.

There are occasions when a client may need to fully or partially encash their investment bond(s) at different times within one tax year, creating a series of gains. How these bonds are encashed can determine any chargeable gains realised within that tax year and the calculations for tax.

Final event calculation

Irrespective of the number of bonds (or segments) being encashed, for final events this calculation will always be the same.

However, in certain instances it is possible to utilise top slicing relief on the gain for clients. This is used where a client is a basic rate taxpayer who could become a higher rate taxpayer or a higher rate taxpayer who could potentially go into additional rate tax.

Top slicing is a method of determining an annual equivalent value of the gain made over the full number of years the bond has been held. This annual equivalent will be added to the client’s income for the tax year in which the gain arises and will help determine the rate of tax the client will pay on the whole of the gain. These calculations will remain generally the same for encashments of full bonds or individual segments but can vary depending on the source of multiple encashments. 

This is explained in more detail in our factsheets “Chargeable gains on onshore bonds” and “UK taxation of offshore bonds Part 1 chargeable events”. 

Multiple bond encashments

If more than one bond is being encashed then the final event calculation is still used. However, a different calculation will be used to work out an average top slicing figure to cover all the different bonds gains.

To cope with this the calculation will use aggregate figures. In this way the calculation will use an average of all gains and top slices applied.

The multiple encashment calculation is;

add all bond gains together (aggregate gain), divide by the total of all top sliced gains (aggregate slice), = the average relevant years.

The aggregate slice will be added to the client’s income to determine if, when adding this slice, they become a higher rate or additional rate taxpayer. To determine the tax to pay, you will multiply the aggregate slice that falls into the higher or additional rate tax band by the average relevant years and the resulting figure will be the amount of additional tax that is due.

Example, onshore bond;

Client has a number of investment bonds which have been encashed, each with a gain

Bond Gain Years held Top sliced gain
1 £3,200 5 £640
2 £66,600 13 £5,123
3 £12,000 10 £1,200
4 £37,200 12 £3,100
Total £119,000
(aggregate gain)
  £10,063
(aggregate slice)

 

You have to apply the multiple encashment calculation:

Add all bond gains together (aggregate gain) and divide by the total of all top sliced gains (aggregate slice) to equal the average relevant years.

£119,000/£10,063 = 11.825 average relevant years.

Total income for tax year 2016/17 is £27,500 (personal allowance is lost as the total gain plus income exceeds £100,000). Basic rate tax relief band is £32,000 (2016/17).

This means that after income, the client has scope left for basic rate tax of £4,500 i.e. £32,000 (basic rate threshold) minus £27, 500 = £4,500.

We can now add the aggregate slice (i.e. £10,063) to the income to determine the tax to be paid. This will use up the £4,500 remaining of the basic rate tax band and leave £5,563 in the higher rate tax band with further tax to pay.

To determine the tax to pay you will increase the amount of aggregate slice falling in the higher rate tax band by the average relevant years, so:

£5,563 x 11.825 = £65,782 gain liable to higher rate tax.

Basic rate tax already deemed to be paid therefore £13,156.40 (£65,782 x 20%) tax to pay.

The above example is relevant to all circumstances where chargeable events arise in the same tax year from more than one bond, so may also apply to segment encashment, surrenders exceeding the 5% tax deferred allowance and full surrenders from these multiple bonds.

HMRC have a slightly different calculation that they apply to determine the actual tax due on the top sliced gain. Although the calculation is slightly different the end result should be the same*. The calculation is:

(Additional tax on the slices x aggregate gain)/ aggregate slice.

On the calculation shown above this would be:

(£1,112.60[£5,563x20%]  x £119,000 [aggregate gain])/£10,063 [aggregate slice] = £13,157.05

*subject to rounding

Aggregate values where a bond has made a loss

It is not possible to offset a loss on one bond against a gain on another bond. This means that if there are multiple bond encashments in one tax year you would ignore the bond with the loss from the aggregate calculations.

Multiple gains on one bond within a tax year

As all of these gains are in relation to the same bond there is no need for aggregation as they will all have the same start and end date. In these circumstances however the client may be able to use the extended final policy year rules to be able to offset the previous chargeable event in the last tax year against the final chargeable event calculation.

Multiple bond encashments – offshore

The same principle applies to offshore bonds as to onshore bonds. However, it needs to be remembered that as the bond is offshore there will always be tax to pay on the gain. The simple way of looking at this is that the whole of the gain (before  sliced) will be subject to basic rate tax and any gain falling into higher rate tax after applying top slicing, as described above, will determine how much of the gain is subject to higher rate tax. This same principle will be used for gains between higher and additional tax rates.

Example, offshore bond:

Client has investment bonds which are being encashed, each with a gain

Bond Gain Years held Top sliced gain
1 £22,000 8 £2,750
2 £21,200 15 £1,413.33
Total £43,200
(aggregate gain)
  £4,163.33
(aggregate slice)

 

£43,200/£4,163.33 = 10.376 average relevant years

Total income for tax year 2016/17 of £39,500 and has a full personal allowance of £10,600. Basic rate tax relief band of £32,000 (tax year 2016/17) plus full personal allowance of £11,000 gives the client £43,000 before they pay higher rate tax. This means that after income, the client has scope left for basic rate tax of £3,500.

We can now add the aggregate slice (£4,163.33) to the income to determine the tax to be paid. This will use up the £3,500 remaining of the basic rate tax band and leave £663.33 in the higher rate tax band with further tax to pay.

To determine the higher rate tax to pay you will increase the amount of the aggregate slice falling in the higher rate tax band by the average relevant years, so:

£663.33 x 10.376 = £6,882.71 gain liable to higher rate tax.

As this is an offshore bond no tax has been paid at the point of encashment. On this basis, basic rate tax will be paid on the whole £43,200 aggregate gain (£43,200 x 20% = £8,640). The top slicing then shows how much of the total gain will also be liable to pay higher rate tax. In this example there is a gain of £6,882 in higher rate tax and therefore there will be an additional tax charge of £1,376.40 (£6,882 x 20%) over the basic rate tax already calculated.

The total tax payable in this example is therefore £10,016.40 (£8,640 + £1,376.40)

Onshore and offshore bonds

The process for calculating the gains when there is a scenario with both onshore and offshore bonds is slightly more complex and will involve an additional step. The complexity occurs as tax is deemed to have been paid on the onshore bond but not the offshore bond. You will see there is an additional step within the calculation below to cover this additional tax calculation. 

Example, onshore and offshore bond

Bond Gain Years held Tax credit Top sliced gain
Onshore £22,000 8 £4,400  £2,750
Offshore £21,200 15   £1,413.33
Total £43,200
(aggregate gain)    
  £4,400 £4,163.33
(aggregate slice)

 

£43,200/£4,163.33 = 10.376 average relevant years

Total income for tax year 2016/17 of £39,500 and has a full personal allowance of £11,000. Basic rate tax relief band of £32,000 (tax year 2016/17) plus full personal allowance of £11,000 gives the client £43,000 before they pay higher rate tax. This means that after income, the client has scope left for basic rate tax of £3,500.

Offshore bond basic rate tax calculation (additional step)

First look at the basic rate tax due on the offshore bond. This can be done by looking at the overall aggregate gain on the two bonds of £43,200. Basic rate tax of 20% is due on all of this gain, so £43,200 x 20% = £8,640. We are aware that there is a tax credit sitting with the onshore bond of £4,400 where the basic rate tax is deemed to have been paid. If we remove this from the overall basic rate tax due of £8,640 we have outstanding tax due of £4,240. Now apply the standard top slicing calculation

For this we add the aggregate slice to the income. This will use up the £3,500 remaining of the basic rate tax band and leave £900 in the higher rate tax band with further tax to pay.

To determine the higher rate tax to pay, you will increase the amount of the gain falling in the higher rate tax band by the average relevant years, so:

£900 x 10.376 = £9,338 gain liable to higher rate tax.

This top slicing then shows how much of the total gain will be liable to higher rate tax. In this example there is a gain of £9,338 in higher rate tax and so there will be a tax charge of £1,867.60 (£9,338 x 20%). As this is a calculation for higher rate tax, there will be no difference between the onshore and offshore tax calculations and so they can be treated the same within the calculation.

The total tax payable in this example is £6,107.60 (£4240 + £1,867.60)

 

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