Budget 2020: Top slicing relief on insurance policies

TSR is a valuable relief that can help to reduce the tax due on chargeable gains arising on the surrender of an insurance and investment policy.

In recent years there has been some uncertainty regarding the calculation of TSP, specifically in circumstances where an individual loses their tax free personal allowance because the sum of their income and chargeable gain exceeds the £100,000 threshold.

In September 2019 we produced this update regarding a recent tax case, which was won by the taxpayer despite being heavily contested by HMRC.  

In response the government has sought to put the calculation of TSR beyond doubt, by including the following amendments in the Finance Bill 2020.

• The changes will confirm that a personal allowance can be reinstated within the taxpayer’s TSR calculation where it has been reduced by reason of including a gain in their income for the year. For this purpose, the personal allowance will be calculated by reference to the taxpayer’s other income and a proportion of the gain.
• It will also confirm that in the TSR calculation, allowances and reliefs have to be set as far as possible against other income in preference to the gain.

The changes take effect in relation to chargeable event(s) arising after 11 March 2020.  

While the changes are welcome for providing greater clarity, it certainly ends the more hard-line approach that the reinstated personal allowance could be offset entirely against a taxpayer’s ‘sliced’ gain, despite a taxpayer having significant other income.