Just as pilots run through a checklist before departure, paraplanners should review several key factors before an investment bond encashment proceeds. Tom Archer, Tax and Trust Specialist at Quilter, explains why those checks matter when assessing top slicing relief.
A client fully surrenders an investment bond and suddenly has a six-figure chargeable event gain treated as savings income.
On paper, the tax position can look alarming. In practice, top slicing relief may reduce the tax due. Before relying on it, four checks matter: who is taxable, whether the bond is onshore or offshore, how many relevant years apply and which allowances are affected.
Why do we need top slicing relief?
Investment bonds defer tax until a chargeable event occurs, so several years of growth can be taxed in one year. Top slicing relief recognises that distortion. It does not reopen earlier tax years.
Instead, the gain is divided by the number of relevant years to produce an average slice, which is tested in the tax year of the gain. This can limit higher or additional rate tax where the gain has built up over time.
The calculation is made in four steps
Calculate the full-gain tax after credit → calculate the average-slice tax after credit → the difference gives the relief → deduct the relief.
The calculation compares the tax due on the full gain with the tax due using the average slice after applying a basic rate tax credit. Top slicing relief is a secondary relief – it is a deduction from an individual’s income tax bill based on the tax due on the full gain, not a reduction in the chargeable event gain itself.
For onshore bonds, the basic rate tax credit reflects tax treated as paid within the bond. For offshore bonds, a deemed basic rate tax credit is used for the top slicing relief calculation only, to help keep the relief broadly consistent between onshore and offshore bonds.
The basic rate tax credit is currently 20%. From 6 April 2027 it increases to 22%, reflecting the increase in the basic rate for savings income.
The pre-flight checks
Make these checks before encashment. Once the chargeable event has been triggered, the tax position is set.
Who is taxable? Check who is liable for the chargeable event gain. Top slicing relief is not available where trustees are liable.
Trustees pay tax at the trust rate, although the first £500 may fall within the 0% band. If trust income exceeds £500, the 0% band is lost and the whole amount is taxable.
Is the bond onshore or offshore? For onshore bonds, the basic rate tax credit reflects tax treated as paid within the bond. Offshore bonds do not have tax paid at source, but a deemed tax credit is used for the top slicing relief calculation only.
It is not an actual credit against the final income tax liability.
What is the relevant number of years? Do not assume this is simply the age of the bond. For a full surrender, it is the number of complete policy years since the bond started. For an excess event, it may only run from a previous excess gain.
Bond history matters.
Which allowances are affected by the full gain? Top slicing relief does not reduce the chargeable event gain.
The full gain is still used for the client’s wider tax position, so it can taper or remove the personal allowance, reduce or remove the personal savings allowance and affect the starting rate for savings.
Confusingly, the average slice is then used inside the relieved liability calculation. The key is to remember: the full gain drives the real-world position, while the average slice drives the tax reduction/relief that can be applied.
Paraplanners do not need to learn the calculation by heart; Quilter has a calculator to do the heavy lifting (see here). The key is to check the inputs: who is taxable, whether the bond is onshore or offshore, the relevant years and how the full gain affects allowances. Those checks need to happen before any gain is triggered.
Main image: cockpit, blake-guidry-UOJ6vz2khrY-unsplash
