As a direct result of the taxpayer’s success in Marina Silver (TC7103), the legislation governing the taxation of chargeable event gains will change for such events occurring on or after 11 March 2020. Readers not familiar with the Silver case should see the articles ‘It’s all gone Pete Tong’ (Taxation, 27 September 2017, page 14) and ‘Silver wins gold’ (Taxation, 20 May 2019, page 8).

“The so-called 'Silver clause’ is to be welcomed inasmuch as it ensures that taxpayers will no longer be overcharged.”

So, what has changed? The draft clauses effect two quite distinct ‘changes’. The first change articulates the interpretation approved by the First-tier Tribunal in Silver. In performing the calculations required by ITTOIA 2005, s 536(1) and s 537, the individual’s personal allowance, but not any other relief or allowance, is to be calculated as though the gain from the chargeable event is limited to the proportion of the gain. The second change introduces a new rule as to how those calculations are to be made. The rovisions of ITA 2007, s 25(2), that require reliefs and allowances to be set against income in a way that results in the greatest reduction in an individual’s income tax liability, do not apply in performing the calculations required by ITTOIA 2005, s 536(1) and s 537.

The Silver clause

The so-called ‘Silver clause’ is to be welcomed inasmuch as it ensures that taxpayers will no longer be overcharged by an incorrect interpretation of the legislation. It also introduces a new statutory rule that overrides the interpretation in Silver by limiting the application of the new clause to the individual’s personal allowance under ITA 2007, s 35, but not extending it to the amount of any other relief or allowance. This latter point means, for example, that if the taxpayer has reliefs such as qualifying loan interest that are limited to the higher of £50,000 or 25% of adjusted total income, the same amount will be used in the calculation of tax on one slice as applies in the calculation on the full gain. 

What about calculations on chargeable event gains arising before 11 March 2020? 
I would argue that the personal allowance element of the new clause simply confirms how the legislation should always have been interpreted. This point is key to those thousands (literally) of taxpayers who have been awaiting the outcome of the Silver case before themselves obtaining redress from HMRC.

Until now the standard HMRC response to such claims has been, broadly speaking, that the department disagrees with the First-tier Tribunal decision and stands by the department’s own interpretation.

However, it is noteworthy that the explanatory note (tinyurl.com/qs9h4wa) published on 11 March includes the following statements (emphasis added):

     'Subsections 3 and 4 confirm the calculation of the income tax liability on a proportion of the gain as required
     within the calculation of top-slicing relief in ITTOIA 2005, s 536(1) and s 537. The clarifications allow the individual’s
     personal allowance, but not any other relief or allowance, to be calculated as though the gain from the chargeable
     event is limited to the proportion of the gain.

     ‘Background note
     ‘Top-slicing relief is designed to mitigate the impact of individuals being charged to tax at a higher rate due to the
     inclusion of a life insurance policy gain, or gains, in income for the year.
           ‘This clause will put beyond doubt the calculation of top-slicing relief by setting out the basis of the personal
     allowance available and specifying how allowances and reliefs can be set against life insurance policy gains.
     This ensures a fair outcome for those taxpayers eligible for top-slicing relief, in line with the original policy intent, and
     prevents excessive relief.’

It seems to me that the use of words and phrases such as ‘confirms’, ‘clarifications’, ‘put beyond doubt’, ‘ensures a fair outcome’ and ‘original policy intent’ all point towards
acceptance by HMRC that the interpretation approved by the First-tier Tribunal was indeed right all along.

Why does all this matter? Well, at 5pm on 17 March (coincidentally the deadline for the delivery of HMRC’s skeleton argument) the department submitted to the Upper Tribunal notice of withdrawal of its appeal in the Silver case. On 19 March, Judge Richards consented to withdrawal of the appeal with HMRC to pay reasonable costs. 
It is well known that decisions of the First-tier Tribunal, while of persuasive value, are not binding in other proceedings. I had asked the Upper Tribunal to dismiss HMRC’s appeal rather than to allow withdrawal, anticipating that withdrawal could leave us in a very tiresome situation: HMRC might continue to reject claims by other taxpayers and we would need a further First-tier Tribunal decision to take us back to the Upper Tribunal. I hope we will very soon know where we stand on this.

The allocation clause

The second limb of the new legislation addresses the way in which allowances and reliefs are to be allocated in the calculations of top slicing relief. Coincidentally, I assume, I had sent HMRC the following example of a case where the department’s 2019-20 calculator is undercalculating top slicing relief even though the personal allowance issue did not arise.

                             Employment income £55,000
                             Chargeable event gain (six years term) £10,000

The HMRC calculator allocates the £12,500 personal allowance as follows:

Tim good - Taxation 26 March 2020