No, nothing to do with cakes, sadly, but a way of nominally spreading a chargeable event gain (CEG) over a number of years to calculate the income tax due.
You pay tax as if you had received the CEG as the top slice of your income over several tax years (the top slice years) instead of just the one year the money was actually received. This usually results in a lower bill for the taxpayer.
For example, if your CEG was £20,000 and the gain had arisen over 20 years then this equates to £1,000 per year. You work out what the tax would be on £1,000 for the year of receipt (treating that £1,000 as the ‘top slice’ of your income) and multiply the result by 20 to determine the tax liability.
First Tier Tribunal case
HMRC have just lost an interesting case where they had denied a personal allowance to someone because the amount of the CEG received took her over the income limit in the year of receipt. The personal allowance is withdrawn for individuals with income over £100,000.
When calculating the additional liability for the year of receipt, HMRC did not take account of any personal allowance.
The individual argued that had the income actually been received over a number of years she wouldn’t have exceeded the income limit in any of those years and so would have benefited from the personal allowance.
The tribunal agreed with her and knocked £22,000 off her tax bill.
What’s the moral of this tale?
Well, the tax on chargeable event gains and top slicing relief can be complicated and HMRC doesn’t always get it right.
If in doubt, get it checked out!
The case summary for Silver v HMRC can be read at this link
