Income Tax (Trading and Other Income) Act 2005 section 536

Top slicing relieved liability: one chargeable event

Section 536 sets out how to calculate the "relieved liability" for top slicing relief purposes where an individual has a gain from only one chargeable event in a tax year.

• The gain is divided by the number of complete years the policy or contract has run ("N") to produce an "annual equivalent", and the net tax on that annual equivalent is calculated by working out the income tax due (applying highest part assumptions and adjusting the personal allowance) and subtracting the basic rate tax credit deemed paid under section 530(1).
• The relieved liability is found by multiplying the net tax on the annual equivalent by N — effectively spreading the gain evenly over the life of the policy and then scaling the tax back up.
• N is modified in specific circumstances: where there has been a previous calculation event (such as a part surrender or assignment giving rise to a gain), N becomes the number of complete years since that earlier event; and where the policy is a replacement ("new policy") for an earlier policy, N is measured from the issue of the original policy in the chain.
• Where the gain is reduced under section 528 for periods of non-UK residence, N is itself reduced by the number of complete years (foreign days divided by 365, rounded down) attributable to the foreign period within the material interest period.