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UK taxation of offshore bonds, part 2

Reliefs available where a chargeable event gain has been made. It is recommended that this article is read in conjunction with UK taxation of offshore bonds - Part I Chargeable Events which details how the chargeable event regime works.

Who is liable to pay the income tax on chargeable events

Chargeable events are liable on the bond owner. Where there are joint bond owners the liability to income tax on the chargeable gain is split equally between the bond owners (i.e. two bond owners would mean 50% of the gain is assessable for each).

The chargeable gain is added to their highest slice of income. So, earned income, then other savings income (including chargeable event gains for offshore bonds), then dividend income and then chargeable gains for chargeable event gains for onshore bonds).

The thresholds quoted below, are based on taxable income and therefore do not include income which falls within the personal allowance for income which is not subject to income tax.

Where the bond owner dies in a tax year where chargeable events occur, generally any chargeable gain would be paid by the Legal Personal Representatives of the deceased and recovered from the value of the estate. For details of tax assessment for chargeable events for Legal Personal Representatives, please read our article: 'UK tax – Chargeable Events and LPRs'.

Reliefs available for use with chargeable event gains

 

Reliefs available for use with chargeable event gains

Top slicing relief

This relief is designed to ensure individuals who are normally basic rate taxpayers except for this chargeable gain are able to assess their gain for income tax across the number of complete years the bond has been invested to reduce or remove their liability to either:

(i) higher rate income tax for basic rate taxpayers; or
(ii) additional rate income tax for basic and higher rate taxpayers due to the chargeable gain.

Top slicing relief is not available for additional rate taxpayers before the chargeable gain is assessed. Also, top slicing relief cannot reduce a taxpayer's liability below the basic rate of income tax.

If time apportionment relief applies for the bond owner, then time apportionment is applied before calculating top slicing relief.

The top slicing relief will apply to all chargeable gains occurring in the same tax year.

For each chargeable gain you need to calculate the ‘slice gain’. The slice gain is the chargeable gain for a bond divided by the number of complete years that bond has been invested

The slice gains are then added together to make the total slice gains 

Top slicing relief is then calculated using the following formula:

Step 1        
Total tax liability for the total gains in the tax year

MINUS

Basic rate tax liability* for the total gains in the tax year

=

The net tax liability for total gains
         
Step 2        
Total tax liability for the total slice gains in the tax year

MINUS

Basic rate tax liability* for the total slice gains in the tax year

=

The net tax liability for the total slice gains
         
Step 3        
Net tax liability for total gains

MINUS

Net tax liability for total slice gains x number of years over which the gain was sliced

=

The amount of the relief which can be applied to the chargeable gains

Both the total gain and the total slice gains in the tax year in turn are assessed for income tax after all your other taxable income has been included. Income tax will be levied at, 20%, 40% and 45% at the relevant income tax thresholds for the chargeable gains.

* Even though an offshore investment bond is not eligible for a tax credit against the basic rate tax liability (unlike the case for UK investment bonds), for the purposes of calculating top slicing relief, the basic rate tax liability is deducted from the total tax liability of both the total gains and the total slice gains as if the tax credit did apply. This ensures that the relief is limited to higher rate and additional rate tax liabilities for offshore investment bonds.

The difference in the net tax liability between the total gains and the total slice gains is the top slicing relief that will apply.

Examples

Mr Brown has a gain under his bond. He has owned the bond for four years and the gain is £24,000. The top sliced gain is £6,000 i.e. £24,000/4 (years).

Assuming that Mr Brown’s other taxable income is £30,000 and the gains occur in the tax year 2016/2017:

Personal Allowance 

(£11,000)

Used by other income

Starting Rate at 0% Savings       

(£5000)

Used by other income
 Personal Savings Allowance                   

(£1000)

Used by other income
 Basic Rate Threshold

(0 to £32,000)

First £30,000 used by other taxable income
£2,000 of gains at 20% = £ 400
 Higher Rate Threshold 
(£32,000 to 150,000)
£22,000 of gains at 40% = £8,800
 Additional Rate Threshold Income 
(£150,001+)
£0 of gains at 45% = £ 0

 

Total tax liability of total gains for the tax year is therefore £9,200

Tax payable on the total slice would be:

Personal Allowance 
(£11,000)
Used by other income
Basic Rate Threshold 
(0 to £32,000)
First £30,000 used by other taxable income

Starting Rate at 0% Savings

(£5000)

Used by other income                                                                              

Personal Savings Allowance

(£1000)

Used by other income
 Higher Rate Threshold 
(£32,000 to 150,000)
£4,000 of gains at 40% = £1,600

 Additional Rate Threshold Income 
(£150,001+)

£ 0 of gains at 45% = £ 0

Total tax liability of total slice gains for the tax year is therefore £2,000

Step 1
£9,200 tax on full gain - £4,800 (20% of £24,000) = £4,400

Step 2
£2,000 - £1,200 (20% of sliced gain, £6,000) = £800

Step 3
£4,400 - £3,200 (£800 x 4) = £1,200

The income tax due in respect of the total gains after top slicing relief is therefore £8,000. (i.e. £9,200 - £1,200).

However, if we assume Mr Brown's other taxable income is still £30.000 but the chargeable event gain is £130,000 in the tax year 2016/17 (and therefore the top sliced gain is £32,500 (£130,000/4)):

 Personal Allowance
(£0**)
 
 

Personal Savings Allowance

(£500)

 Used by other income
 Basic Rate Threshold 
(0 to £32,000)
 First £30,000 used by other taxable income
£2,000 of the gains at 20% = £400
 Higher Rate Threshold 
(£32,000 to 150,000)
 £118,135 of gains at 40% = £47,254
Additional Rate Threshold Income 
(£150,001+)
 £9,865 of gains at 45% = £4,439.25


Total tax liability of total gains for the tax year is therefore £52,093.25

Tax payable on the total slice would be:

Personal Allowance 
(£0**)
 

Personal Savings Allowance

(£500)

Used by other income
Basic Rate Threshold 
(0 to £32,000)

First £30,000 used by other taxable income
£2,000 of sliced gains at 20% = £400

Higher Rate Threshold
(£31,785 to 150,000)
£30,500 of sliced gains at 40% = £12,200
Additional Rate Threshold Income 
(£150,001+)
£ 0 of sliced gains at 45% = £ 0


**As Mr Brown's total income exceeds £120,000 for the tax year, he will not be entitled to any personal allowance

Total tax liability of total slice gains for the tax year is therefore £12,600.

Step 1
£52,093.25 - £6,500 (20% of £130,000) = £26,093.25

Step 2
£12,600 - £6,500 (20% of £32,500) = £6,100

Step 3
£26,093.25 - £24,400 (£6,100 x 4) = £1,693.25

The income tax due in respect of the total gains after top slicing relief is therefore £50,400. (i.e. £52,093.25 - £1,693.25).

Time apportionment relief

If the bond owner has been non UK resident for some of the time they have owned the bond since it started, the chargeable gain may be reduced to reflect the period that they were not UK resident.

   

Number of days they have been resident in the UK

   

Gross gain

X

__________________

=

Net chargeable Gain

   

Number of days the policy has been in force

   

Time apportionment relief does not apply where the bond has been owned by a Trust previously. For further information on time apportionment relief and its interaction with other reliefs.

Deficiency relief

If the bond owner makes a chargeable loss on a final event (other than full assignment) and the same bond owner has previously made excess gains on the bond, they can use the chargeable loss (limited to the amount of the previous excess gains) to reduce their higher rate income tax liability for the tax year in which the chargeable loss occurs.

Please note that policies issued on or after 21 March 2012, will no longer be able to include excess events (including PPB deemed gains) in the full surrender calculation, where those excess events have not been charged to UK income tax (for example, the policyholder was not UK resident at the time the excess events occurred).

Insurers will still calculate the gain (or loss) including all previous excess events, but when the policyholder comes to complete their self-assessment form, they will need to increase the gain (or reduce the loss by any excess event gains (including deemed gains) made while they were non-UK resident.

These changes will apply to all final event calculations (maturity of the policy, death of the last life assured or full assignment for consideration of money's worth as well as full surrenders).

This change will only affect policies which started before 21 March 2012, if after 20 March 2012, the policy is:

  • assigned in whole or part, or
  • is used as security for a debt, or
  • has further premiums paid to the policy.

Old Mutual International, Old Mutual International Ireland and Old Mutual International Guernsey (OMIG)’s tax reporting obligations for chargeable events

It is important to remember that we do not deduct the tax at source. Old Mutual International, Old Mutual International Ireland and OMIG will report certain payments and events affecting UK tax resident bond owners. It remains an obligation of the policyholder to report all gains to HMRC irrespective of the amount.

Corporation tax on the life assurance funds in which the bond is invested (bondholders’ funds)

Under current Isle of Man legislation Old Mutual International enjoys tax exemption in respect of bondholders’ funds for both CGT and income tax. The same is true for Old Mutual International Ireland in respect of Irish taxation and OMIG in respect of Guernsey taxation.

Old Mutual International, Old Mutual International Ireland and OMIG are also not liable to income tax in the UK. However, certain investment income accruing to a fund may be subject to a tax deduction at source which is withheld in the country where the investment is situated. The income credited to a fund will therefore be net of any such withholding tax. Neither Old Mutual International, Old Mutual International Ireland or OMIG are able to reclaim this withholding tax.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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