Simple assessments, Insurance policy gains, and Reliance on an accountant

In our latest tax tips email for accountants we said:

We take no pleasure in knocking HMRC, but shoddy work has to be called out. This week we highlight the very poor HMRC guidance concerning simple assessments, and a fault in HMRC’s tax calculation software which means taxpayers who receive insurance policy chargeable event gains may pay the wrong amount of tax. However, accountants can also make mistakes, and we have a brief summary of where the taxpayer stands if his accountant fouls up.

Below is just an extract from that email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

Insurance policy gains

When the taxpayer has cashed in a premium life insurance policy or bond, this may create a “chargeable event gain”. This lump sum is taxed as the highest slice of the taxpayer’s income not as a capital gain.

Top slicing relief attempts to put the taxpayer in the position he would have been in, had the lump sum been paid in equal amounts in each year of the bond’s life. It doesn’t exactly achieve that, but it’s a good approximation.

The relief is arrived at by comparing two tax computations:

A. Add the chargeable event amount to other income received in the year, and tax it at the highest marginal rate, less basic rate tax.

B. Divide the chargeable event by the number of years of the bond, calculate the tax due for one year using current year’s tax bands, allowances and rates, deduct basic rate tax and then multiple that answer by the number of bond years.

The top slicing relief is: A – B, which is deducted from the actual tax liability for the year.

However, when HMRC do calculation B the software ignores the savings allowance and any applicable savings rate band. In some cases the HMRC calculation also ignores the taxpayer’s personal allowance. This is incorrect, and leads to understated top slicing relief.

If your client has received a chargeable event gain in the last few years do not rely on your tax return software to calculate the gain, or on HMRC’s figures. The correct result will only be achieved by going back to first principles and following the tax law to the letter. Our personal tax experts can help you with that.