Earlier this year a judgement was delivered in the First-tier Tribunal case involving taxpayer Marina Silver, who argued successfully 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 been accrued over a 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.
The dispute began when HMRC argued that the personal allowance would not be available for those whose combined chargeable event income (the total certificated amount) together with the taxpayer’s other income exceeded the threshold of £125,000 (2019/20). HMRC contended that the specific legislation which directs the hypothetical tax calculation to be carried out should include the personal allowance calculated outside the hypothetical calculation.
The case focuses around how to compute a hypothetical tax calculation, and in particular the availability of the personal allowance which is tapered away once income exceeds £100,000. HMRC sought to rely on the approach which is reflected in their manuals arguing that no allowance was due because with the full chargeable event Marina Silver’s income exceeded £123,000. This argument was over-ruled by the judge and was declared to be inconsistent with Parliament’s presumed intent. When applying top-slicing relief to the chargeable event Marina’s income was less than £100,000 so she was entitled to a full personal allowance in the calculation.
If you are affected by this decision you should consider taking action now to protect any claim. It is possible to amend the 2017/18 tax return (until 31 January 2020 or three months after the return was issued if later). In many cases an affected taxpayer will be able to make a claim to recover overpaid tax arising in 2015/16 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.
All the current indications are that HMRC will resist repaying claims, although it is difficult to see the basis for their appeal. So while protective claims may be advisable in the short term, this dispute may run for a long period as it progresses through the courts.