Taxation of UK Investment Bonds | Brand Financial Training

Now the new CII examining year has started, we thought we would have a look at the five-step process HMRC are using to calculate top-slicing relief on investment bonds.

THIS ARTICLE IS RELEVANT TO EXAMINABLE TAX YEAR 2019/20.

Step 1

Calculate the total taxable income for the year. Identify how much of the gain falls within the starting rate for savings, the personal savings allowance (PSA), the nil rate, basic, higher or additional rate bands as appropriate.

Step 2

Calculate the total tax due on the gain across all tax bands. Deduct basic rate tax treated as paid to find the individual’s liability for the tax year.

Step 3

Calculate the annual equivalent of the gain; calculated by dividing the gain by the number of complete years (HMRC use ‘N’ for the number of complete years).

Step 4

Calculate the liability to tax on the annual equivalent. The amount of the savings starting rate and PSA used in the top-slicing relief calculation are set by virtue of the taxpayer’s adjusted net income for the tax year. They are not adjusted to calculate the notional tax due on the ‘sliced gain’. Deduct basic rate tax treated as paid on the annual equivalent and multiply the result by N. This gives the individual’s relieved liability.

Step 5

Deduct the relieved liability at Step 4 from the liability at Step 2 to give the amount of top-slicing relief due.

Have a look at the five-step process HMRC are using to calculate top-slicing relief on investment bonds. Share on X

Example

Alexa has taxable income in 2019/20 of £36,000. When she fully surrenders her investment bond, she makes a chargeable gain of £20,000. She had held the bond for just over 5 years.

Alexa’s tax liability before top-slicing relief is:

The salary falls in the basic rate band: £36,000 x 20% = £7,200

The PSA of £500 is taxed at 0%

The remainder of the basic rate band = £1,000 x 20% = £200

The balance above £37,500 = £18,500 x 40% = £7,400

Total liability = £14,800

	Step 1 The gain falls within the different tax bands: The PSA of £500 = 0% £1,000 x 20% = £200 £18,500 x 40% = £7,400
	Step 2 Total tax charged on the gain: £7,600 Less basic rate tax treated as paid (£4,000) = £3,600
	Step 3 The annual equivalent of the gain is £20,000 divided by 5 = £4,000
	Step 4 The tax on the annual equivalent of £4,000 = £500 x 0% £1,000 x 20% = £200 £2,500 x 40% = £1,000 Total of £1,200 The tax treated as paid on the slice is £4,000 x 20% = £800 The tax relieved liability is £400 (£1,200 - £800) x 5 = £2,000
	Step 5 Top slicing relief = £3,600 - £2,000 = £1,600

The liability after top-slicing is: £14,800 – £1,600 – £4,000 = £9,200

The taxation of bonds usually shows up in the R03 exam and also regularly features in the AF1 written exam, so candidates should ensure they are comfortable with this new process.

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How to Calculate the Top-Slicing Relief on UK Investment Bonds