What does top slicing refer to in taxation?

Top slicing is a method used primarily in taxation to calculate the capital gains tax or the taxation of gains from certain financial products like life insurance policies. It involves taking the total gain from the policy and dividing it by the number of years the policy has been in force to determine an average annual gain. This average gain is then taxed as if it were part of the taxpayer's income in the year of disposal or encashment. The purpose of this method is to compute a more equitable tax charge, particularly for individuals whose total income may vary significantly from year to year.

This calculation can result in a lower effective tax rate since it spreads the gains over multiple years, thus preventing the taxpayer from being pushed into a higher tax bracket due to a lump-sum realization of gain. The other choices do not accurately describe the purpose and process of top slicing, making the understanding of this methodology key in assessing capital gains tax liabilities effectively.