This formula applies where:
• the term of the annuity payments is solely dependent on the duration of human life, but
• the amount of the annuity payments does depend on a non-life contingency.
In this situation, the amount of the annuity payment may change in an unpredictable way, which makes actuarial techniques impractical. So the exempt part of each annuity payment is calculated as a constant sum.
A common example of this type of annuity is one whose payments are linked to the value of the retail prices index. It is this type of annuity that may give rise to the situation where the exempt sum may in the early stages exceed the annuity payments.
In this case:
Exempt sum = PP x 1/TY x PM/12
where:
PP = purchase price of the annuity
TY = expected term of the annuity in years, including odd fractions of a year
PM = the period in months, including odd fractions of a month, in respect of which an annuity payment is made.
The expected term of the annuity is the period from the date the first payment starts to accrue to the date the last payment is expected to be payable. It is determined:
by reference to prescribed tables of mortality
as at the date the first annuity payment starts to accrue
taking the age of the life in question in whole years at that date.
Again if for any reason it is not possible to determine that actuarial value by reference to the prescribed tables, the value is to be determined and certified by the Government Actuary Department.
If, exceptionally, the annuity term is dependent on some other contingency in addition to that of human life, the exempt proportion or exempt sum is calculated on a just and reasonable basis, having regard to both the additional contingencies and the relevant formula.
If both the amount of the annuity payment and the annuity term are dependent on non-life contingencies, the exempt sum method is used for income tax purposes.
The above assumes that the owner of the PLA is a UK resident individual.
Companies investing in PLAs
UK resident companies investing in a PLA will be taxed under the loan relationship rules.
Deduction of tax at source
UK resident insurers are obliged to deduct tax at source from the income/interest element.
PLAs issued by non-UK providers
A PLA from a foreign payer can still have an exempt capital amount, but overseas payers must meet certain information requirements as to the basis of the calculation. The payment is of course received without deduction of tax and UK tax on the income element is paid through self-assessment.
PLAs and IHT ‘normal expenditure out of income’
The HMRC analysis is:
‘The capital element of a purchased life annuity within the meaning of ITTOIA 2005/S423 purchased on or after 13 November 1974 is not regarded as part of the transferor’s income for the purposes of the exemption in accordance with IHTA84/S21(3).’
Source: IHTM14250
IHTA 1984 section 21(3) states:
(3) So much of a purchased life annuity (within the meaning of section 423 of the Income Tax (Trading and Other Income) Act 2005 as is, exempt from income tax under section 717 of that Act , shall not be regarded as part of the transferor’s income for the purposes of this section.
Page: 1 2
