In a 2018 First-tier Tribunal (FTT) case, taxpayer Marina Silver successfully argued that she was entitled to a personal allowance when calculating the top slicing relief available to her in the calculation of her income tax liability on a chargeable event gain. Chargeable event gains can arise where an individual surrenders an insurance and investment policy. The insurer will issue a chargeable event certificate. Top slicing relief applies in certain situations to reflect that the gain, as per the certificate, may have accrued over a large number of years, and had the gain been taxed over the same number of years the liability to income tax would have been less, in some cases even nil.
HMRC argued that the personal allowance was not available for those whose combined chargeable event income (the total certificated amount) together with other income exceeded the then threshold above which the personal allowance is withdrawn (for 2019/20 the relevant threshold is £125,000). The case focuses around how to compute a hypothetical tax calculation, and in particular the availability of the personal allowance which begins to be tapered away once income exceeds £100,000. HMRC sought to rely on the approach which is reflected in their manuals arguing that no personal allowance was due.
However this argument was over-ruled by Judge Barbara Mosedale who preferred an approach which considered that only the average annual gain (‘a single slice’) in the calculation of any restriction to personal allowances. As the average annual gain is only a fraction of the total chargeable event gain, there are many circumstances where this will result in personal allowances remaining intact or significantly so producing a much better outcome for taxpayers in terms of the liability attaching. This is now reflected in the Finance Bill 2020 and is expected to soon become law.
Until now, HMRC have resisted claims to recover tax in relation to earlier tax years as the Finance Bill does not have retrospective effect. However, HMRC have recently decided not to appeal the FTT decision, and therefore there would appear to be a valid basis for claiming to recover taxes in respect of previous years.
If you are affected by this decision you should consider taking action now to protect any claim. It is possible to amend the 2018/19 tax return (until 31 January 2021). In many cases an affected taxpayer will be able to make a claim to recover overpaid tax arising in 2016/17 or later, subject to time limits. Most tax software currently relies on the HMRC view and will not deduct the full personal allowance, so a manual calculation for top-slicing relief would need to be performed.
Whilst a First-tier decision is not binding legal precedent, taxpayers can take a positive outcome from the approach taken in the case and the proposed new law. It is still unknown whether HMRC will resist repaying historic claims but until that becomes clear protective claims, which can easily run into tens of thousands of pounds, are advised.