Top slicing relief has rarely been out of the news over the last couple of years. HMRC updated their calculation method but then lost a tax case, 'Silver', in the First-tier Tribunal. An appeal was lodged by HMRC, which they subsequently withdrew before it was heard.

The Spring Budget finally put things straight for gains arising after 11 March. So what's the situation for those who have chargeable gains on investment bonds before this date?

Where are we now?

The Spring Budget confirmed a change to the HMRC approach to taxing bond gains arising on or after 11 March 2020. HMRC have by concession extended this change to apply to all gains in the 2019/20 tax year regardless of when the gain arose*. The change will have no consequence for many taxpayers, but for those who are affected, the new rules will result in more top slice relief and a lower tax bill.

Unfortunately, the new rules don't appear to apply to those with gains from earlier tax years*. As a result, taxpayers who believed that HMRC had overestimated the tax charge may be denied a refund.

Who is affected?

Generally it will affect individuals whose other income plus the averaged gain is less than £100,000, but the full gain when added to income is above this amount.

Those with total income of £100,000 or less won't be affected.

What prompted this change?

The change in legislation was prompted by the decision of the First-tier Tribunal (FTT) in the 'Silver' case back in April 2018, which agreed with the claim made by the taxpayer on gains she had made in 2015/16.

Broadly, the facts of the case were that Mrs Silver made a gain on her life assurance bond over a period of 21 years, which when added to her other income meant that her personal allowance was zero (the personal allowance is tapered by £1 for every £2 of income over £100,000). The HMRC's belief was that no personal allowance was therefore due in any part of the top slicing calculation.

The taxpayer contended that she was still entitled to a full personal allowance in part of the top slicing calculation. This would have resulted in more relief and a lower overall tax bill. Her argument was that the average gain, plus her other income, was well below £100,000. On this basis, her tax bill would have been around £20,000 lower.

HMRC disagreed with the FTT decision and intended to appeal it with the Upper Tribunal (UT). However, this appeal was withdrawn on 19 March 2020, just a week after the Spring Budget.

Had the appeal gone ahead and the decision of the FTT upheld by the UT, it would have been binding and opened the doors to similar claims. However, without this endorsement, the FTT decision is not binding. It's therefore uncertain how HMRC will deal with any future repayment claims on gains made before 2019/20*. So while Mrs Silver won her own case, HMRC may reject other claims.

What could change?

HMRC are expected to provide further guidance on how the change in legislation will affect top slicing calculations in 2019/20. We shall have to wait and see if this guidance extends to the treatment of gains made for earlier tax years*.

Taxpayers could, of course, lodge their own appeal with the FTT, but would have to be aware of the costs involved in doing this. However, should a case reach the UT and a decision made in favour of the taxpayer, this would set a precedent for other claims.

What should taxpayers do next?

Individuals who have made gains in the 2019/20 tax year are unlikely to have submitted their self-assessment returns at this time. If they have already submitted their return HMRC will issue a tax correction notice. For those submitting online returns, then the HMRC will calculate their tax according to the new rules.

Those who have already submitted returns for earlier years and believe that they have overpaid tax have up to four years from the relevant tax year to make a claim for a refund, which this year means they can go back to the 2016/17 tax year*.

But as we've said, relying on the decision in the Silver case is no guarantee that a claim for a refund will be successful, and HMRC may continue to reject such claims in the absence of any further decisions from the FTT and UT. Anyone wishing to pursue a claim may therefore want to engage the appropriate legal and tax advice.