All advisers should be familiar with the fundamentals of top-slicing relief on full surrender, where gains are divided by the number of complete years a bond has been in force. However, for partial surrenders, the top-slicing factor is the number of complete years since the previous chargeable event. For offshore bonds, the top-slicing period reverts back to the date that the bond was effected. For example, where a client is taking, say, 7 per cent a year withdrawals from a UK bond, the top-slicing factor will be one as a chargeable event is occurring each year. With an offshore bond, the top-slicing factor will increase each year, giving rise to a smaller top-sliced gain. Top-slicing relief is only available to reduce potentially any higher-rate tax liability for gains under a bond. For an offshore bond, all gains under the bond will be liable to tax at the savings rate of 20 per cent, apart from gains that fall within the client’s personal allowance or 10 per cent starting-rate band. Turning to CGT position, an individual’s capital gains, in excess of the annual CGT exemption – 8,200 for 2004/05 – are treated as the “top slice” of income and charged to CGT, accordingly. The rate of CGT de-pends on the individual’s total income. Capital gains which, when added to total income, fall within the starting rate limit – 2,020 for 2004/05 – are taxed at 10 per cent. Gains between the starting rate and basic rate limits – 2,020 to 31,400 – are taxed at 20 per cent and above the basic rate limit at 40 per cent. Where an individual has a bond and a portfolio of shares in open-ended in-vestment companies, both of which are showing a gain, the question arises as to which of these will be added to the individual’s income first if surrenders/encashments are made from both investments in the same tax year. In calculating the high-er-rate tax liability on gains under a bond, any capital gains from the encashment of Oeics – or any other chargeable assets – in the same tax year are to be left out of account. In calculating a CGT liability during the same tax year, the top-sliced gain under the bond is included in the individual’s income. For example, an individual has taxable income of 26,000 after deduction of his personal allowance. He also has a top-sliced gain under a bond of 2,500 and has encashed some shares in an Oeic, creating a capital gain of 5,000 in excess of his annual CGT exemption. Charge on the gain under the bondOnly the top-sliced gain, when added to the individual’s income, is included in the computation for the tax year. For example, 26,000 + 2,500 = 28,500. As the basic-rate limit for 2004/05 is 31,400 and the individual’s “adjusted” income does not exceed this, no higher-rate tax is payable on the gain under the bond. Charge on the gain under the OeicAs the gain is treated as the top slice of income, total income for CGT purposes is 26,000 + 2,500 + 5,000 = 33,500. The CGT payable on the gain of 5,000 is (31,400 – 28,500) = 2,900 @ 20% = 580 plus (33,500 – 31,400) = 2,100 @ 40% = 840. Total = 1,420. The effective rate of CGT is 28.4 per cent instead of only 20 per cent if the bond had not been surrendered in the same tax year. It may be advisable for clients to surrender the bond in the next tax year, or restrict the disposal of chargeable assets, so that total income does not exceed the basic rate limit.