Changes made to top slicing relief held not to apply retrospectively

In Sally Judges (as representative for the late R Young) v HMRC [2022] UKFTT 77 (TC), the First-tier Tribunal (FTT) found that the taxpayer was entitled to adopt a more beneficial method of calculating top slicing relief (TSR) and disagreed with HMRC who had argued that amendments made by the Finance Act 2020 to the Income Tax (Trading and Other Income) Act 2005 (ITTOIA), which prevented the more beneficial method of calculation being adopted, applied retrospectively.

Background

TSR is calculated on life insurance policy gains. The aim of it is to counteract potentially unfair treatment for taxpayers who take income from life insurance policies over several years but where the rules contained in Chapter 9, ITTOIA, treat them as taxable on the entire chargeable event gain as a top slice added to their income in a single year (which can otherwise cause them to be subject to a higher rate of tax). 

In Silver v HMRC [2019] UKFTT 0263 (TC), the FTT applied the legislation literally and in accordance with what the FTT considered to be Parliament's intention in relation to TSR, which was to allow a person who had taken income over several years to have relief when provisions taxed them on the entire income in a single year. The FTT held in that case that the taxpayer was entitled to a personal allowance in the hypothetical calculation for TSR, based on the level of her hypothetical income, notwithstanding that the level of her actual income meant that she was not entitled to a personal allowance. 

Following the Silver decision, legislation was introduced in Finance Act 2020 (FA 2020) amending sections 535 to 537, ITTOIA to:

1.  permit a taxpayer's personal allowance to be reinstated within a TSR calculation where it had been reduced as a result of including a chargeable event gain in their income for the year (if this applied, the personal allowance would be calculated by reference to the taxpayer's other income and a proportion of the gain); and

2.  confirm that, in the TSR calculation, allowances and reliefs must be set, as far as possible, against other income before being set against the chargeable event gain.

The above provisions became effective on 11 March 2020.

In the current case, Ms Judges was acting as personal representative for the deceased, Mr Young, who died in March 2018. Mr Young’s income in that year was just under £50,000, but he also had a single chargeable event gain of £232,275 from three life assurance policies which had been held for many years.

Ms Judges submitted Mr Young's final tax return for 2017/18, using HMRC's self-assessment calculator. She appealed against the TSR permitted by the calculator in the white space on the return and included her own calculation of the TSR. Ms Judges calculated that TSR of £50,939 was due, based on the most beneficial way of allocating Mr Young’s personal allowance against his various sources of income. The basis of this calculation was that Mr Young:

1. was entitled to allocate his personal allowance against his sources of income in a way that achieved the lowest income tax liability (applying beneficial ordering); and

2. was not precluded from claiming the personal savings allowance by reference to the annual equivalent of the chargeable event gain.

HMRC reduced the TSR to £6,176 and amended the self-assessment such that additional income tax of £44,763 became payable.

Ms Judges appealed to the FTT.

FTT decision

The appeal was allowed.

HMRC argued that the legislative changes introduced by FA 2020, had retrospective effect. 

The FTT disagreed with HMRC. In its view, the legislation did not have retrospective effect, nor was it a clarification of existing legislation. Rather, beneficial ordering applied for the earlier period and Mr Young was entitled to take account of the personal savings allowance.

Comment

Whilst the FTT acknowledged that the consequence of its decision for Ms Judges could be considered generous, the decision is a consequence of following Silver, which the amending legislation was intended to address prospectively, not retrospectively.

The FTT did not look favourably upon HMRC's attempt (by reference to the Explanatory Notes to the legislation) to effectively substitute its own "wishes and desires" relating to the scope of the legislation, for the will of Parliament.  HMRC cannot simply read things into legislation that are not there. It is the will of Parliament which matters, not the will of HMRC.

The decision can be viewed here.