This is one for British expats.

Key points

• Time apportionment relief (TAR) can reduce a gain when the bond owner has been non-resident at some point during the investment period
• This reduction can be used for gains on all offshore bonds, and some onshore bonds
• Where there has been a change in ownership the relief may now be based upon the ownership and residency period of the person responsible for the tax
• Where TAR has been claimed, it may reduce the number of years used in the top-slicing calculation

What is time apportionment relief?

Gains on investment bonds are subject to income tax if the bondholder is UK resident at the time of the chargeable gain. A bondholder who has been non-resident for part of the investment period can claim a reduction to the chargeable gain in some circumstances. This is known as 'time apportionment relief' (TAR).

TAR is not a tax reducer. Instead the relief provides a reduction to the amount of the gain which is subject to tax. The reduction is based upon the number of days of non-residence over the relevant period.

Reduction in gain = chargeable gain x (number of days of non-UK residence) / (total number of days in the period)

The gain after TAR has been taken off will be the figure added to ‘adjusted net income’ to determine if there is any reduction in the personal allowance.

Calculating time apportionment relief

The TAR rules changed with effect from 6 April 2013 to include gains from both onshore bonds and offshore bonds (previously only offshore bonds could benefit from TAR).

Under the new rules relief is calculated upon the periods of non-residency and ownership -of the person responsible for paying the tax. This may affect policies where there has been a change in ownership as relief will be calculated on their periods of non-UK residence during the time they owned the policy, and not on any periods of non-residency before they became owners of the policy.

The post-5 April 2013 rules

These rules apply to investment bond chargeable event gains arising after 5 April 2013 where the bond is:

• an onshore or offshore bond taken out on or after 6 April 2013, or
• an onshore or offshore bond taken out before 6 April 2013 where the bond has been incremented or assigned since that date.

Ownership

There's no change to the calculation of TAR iIf the individual has always owned and been assessable upon the bond . The gain will continue to be reduced by the proportion of the days of non-residence over the term of the policy.

However, if there has been a change of ownership or who is assessable then TAR is calculated based on the period of non-residence since they became ‘owners’ ownership and residence period of the person who is responsible for paying tax when the gain arises. This period of ownership is also known as the ‘material interest period’.

The new rules mean TAR is available to a policyholder who was non-UK resident for at least part of what is known as the “material interest period” since the bond was taken out. An individual has a ‘material interest’ in the bond if they are the one responsible for the tax. This will be where they are either the:

• legal and beneficial owner of the bond
• settlor of a trust which owns the bond
• legal owner of the bond but have assigned it as security for a debt

This means TAR is only available for the period in which the current person has been assessable for gains on the policy. So where for example the bond was assigned, TAR is only available for the period following assignment.

The reduction in the chargeable gain is calculated as:

chargeable gain x (number of days of non-UK residence in the material interest period) / (number of days in the material interest period)

Example

Brian took out an offshore bond for £100,000 on the 6 April 2008. He retired and went to live in Spain on 6 April 2012. The bond was assigned to his son Robert on 6 April 2016.

Robert surrendered the bond for £220,000 on 6 April 2024. Robert was non-UK resident 6 April 2018  to 5 April 2020 while on secondment in France. As the policy was assigned after 6 April 2013 it will be subject to the new TAR rules.

Brian’s non-residence can be ignored as Robert is now the legal and beneficial owner of the policy. TAR is available to Robert but only for the period in which he was the policyholder (i.e. from 6 April 2016). 

Reduction in gain = £120,000 x (6 April 2018 to 5 April 2020) / (6 April 2016 to 6 April 2024). Therefore reduction in gain = £120,000 x (730/2,920) = £30,000

Assignments between spouses

Assignments between spouses/civil partners living together continue to take into account the transferring spouse/civil partner’s period of non-UK residence. TAR is calculated on their combined period of ownership and residence.

Example

Donald invested £100,000 in an onshore bond on 6 April 2002. He moved to Hong Kong and became non-UK resident on 6 April 2003. Subsequently he returned to the UK and became resident in the UK on 6 April 2016.

Donald assigns the bond to his wife Judith, in May 2020 and she decides to cash it in on 6 April 2024 when it's worth £300,000. As Donald assigned the onshore bond after 6 April 2013, time apportionment relief is available. Judith’s material interest period runs from May 2020 to 6 April 2024. As she has been UK resident throughout this period, she cannot claim TAR on a standalone basis. However, as Donald is her spouse, his material interest period can be added to hers.

£200,000 (chargeable gain) x 4,745 days (13 years non-resident) / 8,030 days (22 years combined ownership of bond). Time apportionment relief = £118,182. Gain = £81,818

Trustees

TAR may also be available to UK resident trustees. They must be liable to tax on the gain because there is a deceased settlor who died in an earlier tax year and who was UK resident when they died. The material interest period is based on the residence history of the settlor.

Executors

TAR may be available to legal personal representatives (LPRs) if the chargeable event gain occurs during the estate administration period. The amount of TAR will be based on any days of non-UK residence during the deceased’s material interest period in the bond.

The pre-6 April 2013 rules

The old rules only applied to offshore bonds. They continue to apply to offshore bond gains arising on/after 6 April 2013 where:

• the bond investment is made before 6 April 2013 and is owned by an individual,
• it hasn’t been incremented or been assigned since 6 April 2013, and
• it has never been owned by non-UK resident trustees or an overseas company.

The gain is calculated in the normal way and then time apportionment relief is available to reduce the gain in proportion to the time spent as a non-UK resident throughout the period the bond has been in force:

Reduction in gain = chargeable gain x (number of days of non-residence in the UK) / (number of days investment bond in force)

Changes in ownership

Changes in ownership since 5 April 2013 on offshore bonds taken out prior to 6 April 2013 will result in bringing the calculation of TAR under the revised rules for post 6 April 2013 policies.

However, where there was a change in ownership of an offshore bond prior to 6 April 2013 TAR will be calculated on the policyholder’s period of non-residence over the full policy term and not just the period since the assignment.

Example

Helen took out an offshore bond on 1 January 2003. She assigned it to her daughter Megan on 6 April 2012. Megan was non UK resident from 6 April 2008 to 6 April 2018. Megan surrenders the bond on 1 January 2024 and there is a gain of £50,000.

Megan is entitled to time apportionment relief as she has been non-UK resident for a period of the ownership. TAR is available even for her period of non-residence prior to the assignment. Reduction in gain = £50,000 x 3,650 (10 years - period of non-residence) / 7,665 (21 years - time bond in force) = £23,810.