What is time apportionment relief?

Gains on investment bonds are subject to income tax if the bondholder is UK resident at the time of the chargeable gain. A bondholder who has been non-resident for part of the investment period can claim a reduction to the chargeable gain in some circumstances. This is known as 'time apportionment relief' (TAR).

TAR is not a tax reducer. Instead the relief provides a reduction to the amount of the gain which is subject to tax. The reduction is based upon the number of days of non-residence over the relevant period.

Reduction in gain = chargeable gain x (number of days of non-UK residence) / (total number of days in the period)

The gain after TAR has been taken off will be the figure added to ‘adjusted net income’ to determine if there is any reduction in the personal allowance.

Calculating time apportionment relief

The TAR rules changed with effect from 6 April 2013 to include gains from both onshore bonds and offshore bonds (previously only offshore bonds could benefit from TAR).

Under the new rules relief is calculated upon the periods of non-residency and ownership -of the person responsible for paying the tax. This may affect policies where there has been a change in ownership as relief will be calculated on their periods of non-UK residence during the time they owned the policy, and not on any periods of non-residency before they became owners of the policy.

The post-5 April 2013 rules

These rules apply to investment bond chargeable event gains arising after 5 April 2013 where the bond is:

• an onshore or offshore bond taken out on or after 6 April 2013, or
• an onshore or offshore bond taken out before 6 April 2013 where the bond has been incremented or assigned since that date.

Ownership

There's no change to the calculation of TAR if the individual has always owned and been assessable upon the bond . The gain will continue to be reduced by the proportion of the days of non-residence over the term of the policy.

However, if there has been a change of ownership or who is assessable then TAR is calculated based on the period of non-residence since they became ‘owners’ ownership and residence period of the person who is responsible for paying tax when the gain arises. This period of ownership is also known as the ‘material interest period’.

The new rules mean TAR is available to a policyholder who was non-UK resident for at least part of what is known as the “material interest period” since the bond was taken out. An individual has a ‘material interest’ in the bond if they are the one responsible for the tax. This will be where they are either the:

• legal and beneficial owner of the bond
• settlor of a trust which owns the bond
• legal owner of the bond but have assigned it as security for a debt

This means TAR is only available for the period in which the current person has been assessable for gains on the policy. So where for example the bond was assigned, TAR is only available for the period following assignment.

The reduction in the chargeable gain is calculated as:

chargeable gain x (number of days of non-UK residence in the material interest period) / (number of days in the material interest period)

Assignments between spouses

Assignments between spouses/civil partners living together continue to take into account the transferring spouse/civil partner’s period of non-UK residence. TAR is calculated on their combined period of ownership and residence.

Trustees

TAR may also be available to UK resident trustees. They must be liable to tax on the gain because there is a deceased settlor who died in an earlier tax year and who was UK resident when they died. The material interest period is based on the residence history of the settlor.

Executors

TAR may be available to legal personal representatives (LPRs) if the chargeable event gain occurs during the estate administration period. The amount of TAR will be based on any days of non-UK residence during the deceased’s material interest period in the bond.

The pre-6 April 2013 rules

The old rules only applied to offshore bonds. They continue to apply to offshore bond gains arising on/after 6 April 2013 where:

• the bond investment is made before 6 April 2013 and is owned by an individual,
• it hasn’t been incremented or been assigned since 6 April 2013, and
• it has never been owned by non-UK resident trustees or an overseas company.

The gain is calculated in the normal way and then time apportionment relief is available to reduce the gain in proportion to the time spent as a non-UK resident throughout the period the bond has been in force:

Reduction in gain = chargeable gain x (number of days of non-residence in the UK) / (number of days investment bond in force)

Changes in ownership

Changes in ownership since 5 April 2013 on offshore bonds taken out prior to 6 April 2013 will result in bringing the calculation of TAR under the revised rules for post 6 April 2013 policies.

However, where there was a change in ownership of an offshore bond prior to 6 April 2013 TAR will be calculated on the policyholder’s period of non-residence over the full policy term and not just the period since the assignment.

Pre 6 April 2013 onshore bonds

There is generally no TAR for onshore bonds taken out before 6 April 2013. However, they can become brought into the post 6 April 2013 TAR regime if they are assigned or incremented after this date.

Time apportionment relief: restriction of top slicing relief

Where the policyholder is eligible for TAR there will be a reduction to the amount of top slicing relief available. 

The number of years used in the top-slicing relief calculation will be reduced by the number of complete years where the policyholder was non-UK resident.

Where there has been a change in ownership only the period of non-residence since the assignment is used. The exception is an assignment between spouses/civil partners living together where their residence status over the combined period of ownership may be used. In this situation the number of years for top slicing will be reduced by the combined period of non-residence during the policy term.

Note: The gain after the reduction for time appointment relief is used when calculating top slicing relief.

Taxation of gains while non-UK resident

If someone creates a chargeable gain while they're not resident in the UK, there is generally no tax charge in the UK. The bondholder will need to seek advice to determine what tax may apply in their country of residence.

Temporary non-residence

There may be tax to pay on their return to the UK if someone becomes non-resident for a short period and creates a chargeable gain while non UK resident.

The temporary non-residence rules will tax the gain in the tax year of return where;

• the bond was taken out before the period of non-residence,
• the bondholder was resident in the UK at least four of the last seven tax years, and
• becomes UK resident again within five years of leaving.

Time apportionment relief will be available for the period of non UK residence.