A recent client query has reminded Equerry Investment Management just how complicated things can get when a non-taxpayer, with relatively low amounts of income from a variety of sources, makes a large chargeable event gain on an offshore bond.

So, for your information, here is a reminder of the rules.

Offshore bond gains are taxed as savings income and can provide a non-taxpayer with the opportunity to realise tax-free gains within a combination of the personal allowance, 0% starting rate band for savings and the personal savings allowance (PSA).

However, it is important to remember that there is a hierarchy that governs where different sources of income sit in the tax calculation, and sometimes this can operate to create an additional rate tax liability for a non-taxpayer, even if top-slicing relief means that there will only be a basic rate liability on the gain itself.

The facts of the case sound simple enough but need careful consideration when working through the following example. Two non-taxpayers, Holly and Joanna, aged 18 and 19 respectively, are about to inherit a bond standing at a significant gain. Holly has other income of just £525, while Joanna’s income for the current tax year is £7,650.

Their income is broken down as follows:


Bank interest     £50

Dividends            £475


Bank interest     £325

Dividends            £2,425

Rental income   £4,900

The bond gain is £804,467, so a gain of £402,233 per individual. However, as the bond has been in force for 15 full policy years, the top-sliced gain is just £26,822.

It’s important to remember that while top-slicing relief can prevent a higher-rate liability arising on the gain itself, the whole gain is added to other income to determine the availability of the personal allowance and the PSA. As the personal allowance is lost where adjusted net income exceeds £123,700 (£100,000 plus twice the personal allowance) and the PSA is not available to additional rate taxpayers, Holly and Joanna will be taken into higher rate if the top-sliced gain, when added to other income, takes them above £34,500.

Fortunately, both girls are still just within basic rate even when these factors are taken into account and the gain will not therefore be subject to any tax at the higher or additional rate.

But what is the impact on other income?

In Holly’s case, the position is fairly straightforward from here:

  • The bank interest uses the first £50 of her 0% starting rate band for savings, leaving £4,950 to offset against the bond gain (remember she has no personal allowance);
  • the balance of the bond gain will be taxed at 20% due to top-slicing relief; and
  • the dividend (which sits on top of the offshore bond gain) will fall within her dividend allowance, which is available to all taxpayers regardless of their level of income.

In Joanna’s case, the position is slightly more complicated by the fact that she has £4,900 of non-savings income and dividends above the dividend allowance:

  • As Joanna’s non-savings income (i.e. her rental income) is below £5000, she will benefit from the starting rate band for savings. However, because non-savings income takes priority over savings income in the tax calculation, the level of Joanna’s non-savings income reduces her starting rate band to just £100. This means that £100 of her interest income will be taxed at 0%, with the balance taxed at 20%.
  • The bond gain will also be taxed at 20% due to the availability of top-slicing relief. This means that there will be a tax liability of £80,447 on the bond gain.
  • The gain will, however, also have an effect on how Joanna’s dividend income in excess of the dividend allowance will be taxed. This is because dividend income sits above savings income in the tax calculation. Consequently, Joanna’s dividend income in excess of the £2,000 dividend allowance will be taxed at 38.1%.


The order in which different sources of income are taxed in the tax calculation hierarchy can have a significant effect on the tax liabilities that result. It is also important to remember that top-slicing has no bearing on the calculation of adjusted net income and a large gain can therefore easily render a non-taxpayer ineligible for the personal allowance. Finally, note that the 0% band for savings income does not necessarily mean that the first £5,000 of savings income will always be tax-free as it will only be available where non-savings income is below the aggregate of the personal allowance and the £5,000 0% band!

Chargeable events

For more information on Chargeable Events and taxation, see the relevant HMRC website pages given here .



Important information: This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence of it without consulting a suitably qualified and regulated person. Opinions constitute our judgement as of this date and are subject to change without warning

Equerry Investment Management is a trade name of Raymond James Investment Services Limited utilised under exclusive licence. Raymond James Investment Services Limited is a member of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3779657. Registered Office: Broadwalk House, 5 Appold Street, London EC2A2AG.


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