UK Annuities: FINANCIAL CONDUCT REGULATED SITES • QUALIFIED, TRUSTWORTHY ANNUITY ADVICE

Centralising Your Pension Annuity Search

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ANNUITIES: Annuities Tax, Annuities Taxation


Pensions and Annuities Tax Research:

Revenue-based Taxes and Benefits
Second Exposure Draft -

Savings and Investment Income of Individuals

Chapter 6.4 Chapter 6.4 Annual payments Plan of Chapter 6.4 Introduction 6.4.1 Charge to tax on annual payments 6.4.2 The income and person chargeable Other income treated as annual payments 6.4.3 Distributions from unauthorised unit trusts Exemption for payments under insurance policies 6.4.4 Health and employment insurance payments 6.4.5 Health and employment risks and benefits 6.4.6 Period for which payments under policy must be made 6.4.7 Commercial risk 6.4.8 Conditions to be met by policies with other benefits 6.4.9 Conditions to be met where policies are linked 6.4.10 Aggregation of policies where employment ends for health reasons 6.4.11 Meaning of the insured 6.4.12 Policies for the benefit of others who contribute to premiums Exemption for personal injury damages etc. 6.4.13 Personal injury damages and compensation payments Partial exemption for purchased life annuities 6.4.14 Exemption for part of annuity payments under purchased life annuities 6.4.15 Meaning of purchased life annuity 6.4.16 Excluded annuities 6.4.17 Extent of exemption under s.6.4.14 6.4.18 Exempt proportion: term not dependent on non-life contingency 6.4.19 Exempt sum: term not dependent on non-life contingency 6.4.20 Consideration for grant of annuities 6.4.21 Determinations 6.4.22 Regulations Exemptions for certain maintenance payments 6.4.23 Restricted exemptions for maintenance payments under pre-15th March 1988 obligations Deduction of tax and grossing up 6.4.24 Payments received after deduction of tax 6.4.25 Grossing up of discretionary payments from trusts 6.4.26 Statements about deduction of tax Supplementary 6.4.27 Meaning of grossing up 6.4.28 Minor definitions 6.4.29 Index of defined expressions Chapter 6.4: Annual payments 1. This chapter deals with income which takes the form of annual payments or is treated as annual payments. It therefore rewrites the part of Schedule D Case III(a) covering annual payments and a number of other provisions which put certain other items of income into Schedule D Case III(a) as annual payments. 2. The chapter begins with a clause for the charge to income tax on annual payments, rewriting the part of Schedule D Case III(a) covering annuities and other annual payments. It is followed by a clause setting out the basis of assessment for this type of income and the person chargeable to tax in respect of it. 3. These basic rules are followed by a clause, under the heading "Other income taxed as annual payments", for income which is treated as annual payments falling within Schedule D Case III(a). 4. Most of the rest of the chapter is devoted to a collection of clauses providing exemptions from income tax for various types of annual payments which would otherwise be taxed only under provisions in this chapter. Exemptions for annual payments which might otherwise be taxed either under provisions in this chapter or under provisions in any other chapter in Part 6, depending on circumstances, are in Chapter 6.8. For the time being we have ignored the possibility of exemptions being available for foreign income. Some of the exemptions for annual payments involve particularly complicated rules. We have included the rules alongside each exemption. 5. As in Chapter 6.2, wherever possible the provisions simply say that the income "is exempt from income tax". Where necessary we deal separately with matters such as deduction of tax and information returns. (See also the commentary on 11.1.6.) 6. The first set of exemption clauses deals with some very difficult legislation for annual payments under certain insurance policies. Benefits received from policies insuring against ill health or loss of employment are exempt from tax. 7. Next, there is a clause providing an exemption from income tax for "periodical payments" in respect of damages awarded for personal injury. 8. The following set of exemption clauses deals with some more difficult legislation. They set out the rules under which part of an annuity payment made under a purchased life annuity is exempt from tax. 9. The final exemption clause contains two restricted exemptions for maintenance payments made under legal obligations established before 15 March 1988. 10. Almost at the end of the chapter come three clauses (which may end up elsewhere) dealing with the position of the payee where annual payments are received or, in the case of discretionary payments from trusts, treated as received after deduction of tax. And, finally, there are three supplementary clauses. 11. "Annual payment" as the expression is used in Schedule D Case III(a) is a difficult concept. It is the subject of a large body of case law which makes it almost impossible to define in concise terms. Broadly, the case law indicates that a payment is an annual payment within the charge to income tax under Schedule D Case III if it is made under a binding legal obligation; it is capable of recurring in more than one year and being described as "annual"; it is income (as opposed to capital) in the hands of the recipient; it is "pure income profit" in the hands of the recipient; it belongs to the recipient; it is not excluded by another statutory provision; and it is not disqualified by the operation of the principle in W T Ramsey Ltd v CIR, (1981) 54 TC 101(1). 12. So, unlike interest, "annual payment" is not a concept of common law. Rather it is a concept of the Tax Acts which has been extensively developed by the judiciary. Consequently, anyone without tax knowledge would have difficulty in identifying an annual payment. 13. Currently, Schedule D Case III(a) refers to some examples of annual payments - "a charge on any property of the person paying the same by virtue of any deed or will or otherwise, or as a reservation out of it, or as a personal debt or obligation by virtue of any contract". These examples have been there for many years but they no longer help the user very much. Despite their connection with the case law we have left them out. This is a change in the statute, but not in the underlying law. It won't affect anyone's liability to income tax. 14. There are many types of annual payment, although they rarely seem to be referred to as annual payments. These days the best known example is probably a payment under a deed of covenant. Other examples are payments under court orders, maintenance payments, insurance payments and royalties. But such payments are only annual payments within Schedule D Case III if they have all the characteristics described above. 15. As the expression "annual payment" causes difficulty we would like to find some other description of this type of income in the hands of the recipient. Indeed, in the context of provisions dealing with the position of the person receiving the payment, it is perhaps a little odd to refer to an "annual payment" at all. But, in the light of the extensive case law, we cannot see any alternative to retaining both the concept and the term. 16. We welcome views on our approach to annual payments. In particular, we welcome views on any alternative to the concept of "annual payment" or to the term itself. 17. We deal with some annual payments in this chapter and we deal with those which are more often referred to as royalties in Chapter 6.5. This is partly because of the large amount of material that would have to be included in this chapter if we covered all aspects of annual payments here. And it is partly because we want to deal with all the various income tax charges relating to receipts from intellectual property in a single chapter. 18. Two provisions which might have been included in this chapter are in fact obsolete. Section 597(2) (pensions under approved retirement benefit schemes) and section 648A(2) (annuities acquired by approved personal pension schemes) both allow the Board of Inland Revenue to direct that payments should be excluded from the Schedule E charge and taxed instead as annual payments within Schedule D Case III. Introduced in 1989 and 1994 respectively, they were designed to deal with the situation where a scheme was not able to set up its PAYE arrangements before the start of the new Schedule E regimes introduced for these schemes. These transitional arrangements are no longer required and the provisions may be removed as unnecessary material. This change won't affect anyone's liability to income tax. (1) [1981] STC 174 Return to Plan of Part 6 Introduction 6.4.1 Charge to tax on annual payments Tax is charged under this section on all annual payments. This is subject to the qualification in subsection (4). The frequency with which payments are made is disregarded in determining whether they are annual. Section 6.4.3 (distributions from unauthorised unit trusts) extends what is treated as annual payments. Some annual payments are exempt from this charge, see- section 6.4.4 (health and employment insurance payments), section 6.4.13 (personal injury damages and compensation payments), section 6.4.14 (exemption for part of annuity payments under purchased life annuities), section 6.4.23(2) and (3) (restricted exemptions for maintenance payments under pre-15th March 1988 obligations), section 6.8.4 (annual payments by individuals). _____________________________ Defined terms: Origin: subs.(1) - ICTA s.18(1)(b), (3) Case III (a), drafting; subs.(2) - ICTA s.18(1)(b), (3) Case III (a), drafting; subs.(3) - drafting; subs.(4) - drafting. _____________________________ Clause 6.4.1 1. This clause derives from Schedule D Case III(a) in section 18(3) and imposes the income tax charge on annual payments. 2. The charge to income tax under Schedule D Case III(a) refers to "any annuity or other annual payment". We have not referred to annuities in this clause because an annuity is only one type of annual payment. We derive this from the wording of paragraph (a) itself. We draw additional support from the meaning of the expression "annuity" under the general law, from the fact that it is otherwise impossible to construe section 347A(5) with section 347A(2), and from dicta of Lord Cross of Chelsea in Ceylon Commissioner of Inland Revenue v Rajaratnam, [1971] ATC 441, 445. 3. The omission of these words is a change in the statute, but not in the underlying law. The change won't affect anyone's liability to income tax. 4. Subsection (2) derives from wording in Schedule D Case III(a). We have, however, omitted the words "whether such payment is payable within or out of the United Kingdom". This point is discussed in the commentary on 6.1.2. 5. Subsection (3) sets out the other income treated as annual payments. Then subsection (4) sets out the annual payments which are exempt from the charge - either in whole or in part. (The individual provisions are considered later in the chapter.) This uses the same approach as in 6.2.1. Is it helpful to set out the scope of the charge to tax in this way? Return to Plan of Part 6 6.4.2 The income and person chargeable Tax is charged under section 6.4.1 on the full amount of the annual payments arising in the tax year without any deduction. For this purpose maintenance payments made under pre-15th March 1988 obligations are taken to arise in the tax year in which they fall due, whether or not the payments are made in that year. For the meanings of maintenance payments and pre-15th March 1988 obligations, see section 6.8.8(3) and (4). Tax is charged under section 6.4.1 on the person receiving or entitled to the annual payments. _____________________________ Defined terms: tax year, section 1.1.1 Origin: subs.(1) - ICTA s. 64-; subs.(2) - Finance Act 1988 ss.36(3), 38(8), Sch. 3 para 32, drafting; subs.(3) - ICTA s.59(1)-, drafting. _____________________________ Clause 6.4.2 1. This clause, which corresponds to 6.2.2 for interest, determines the basis of assessment for annual payments and the person chargeable to income tax in respect of the annual payments. The principal provisions derive from sections 59(1) and 64. 2. Special provision is made for maintenance payments made under pre-15th March 1988 obligations. Return to Plan of Part 6 Other income treated as annual payments 6.4.3 Distributions from unauthorised unit trusts The unit holders in an unauthorised unit trust scheme are treated for the purposes of this Act as receiving annual payments for each distribution period. The payments are treated as made by the trustees after the deduction of income tax. Tax is charged on the gross amount of the payments. The gross amount of a unit holder's payment for a distribution period is calculated as follows: First step: Take the total amount shown in the scheme's accounts as income available for payment to unit holders or investment (the available amount). Second step: Calculate the amount which bears the same proportion to the available amount as the unit holder's rights bear to all the unit holders' rights. Third step: Gross up that amount by reference to the basic rate for the tax year in which the payments are treated as made. The payments are treated as made on the date or latest date provided by the terms of the scheme for any distribution for the distribution period in question, except that if- that date is more than 12 months after the end of the period, or no date is so provided, the payments are treated as made on the last day of the period. In this section distribution period means a period over which income from the investments subject to the trusts is aggregated to ascertain the amount available for distribution to unit holders. If the scheme does not provide for distribution periods, its distribution periods are taken to be successive periods of 12 months, the first of which began with the day on which the scheme took effect. If the scheme provides for a distribution period of more than 12 months, each successive period of 12 months within that period and any remaining period of less than 12 months are taken to be distribution periods. In this section- unit trust scheme has the meaning given in the Financial Services Act 1986, subject to any regulations under subsection (7) below; unauthorised unit trust means a unit trust scheme in the case of which no order under section 78 of that Act is in force at any time in the accounting period in question. Subsection (1) does not apply if- the scheme's trustees are non-UK residents, or the scheme is an umbrella scheme, as defined in section 468(8) of the Income and Corporation Taxes Act 1988. The Treasury may by regulations made by statutory instrument provide that a scheme of a description specified in the regulations is to be treated as not being a unit trust scheme for the purposes of this section. Those regulations may contain such supplementary and transitional provisions as the Treasury think fit. A statutory instrument containing regulations under this subsection is subject to annulment in pursuance of a resolution of the House of Commons. _____________________________ Defined terms: authorised unit trust, ICTA s.832(1); basic rate, ICTA s.832(1); non-UK resident, section 6.4.28(1); tax year, section 1.1.1; unit holder, ICTA s. 832(1). Origin: subs.(1) - ICTA s.469(3), (4), drafting; subs.(2) - ICTA s.469(4); subs.(3) - ICTA s.469(5); subs.(4) - ICTA s.469(6); subs.(5) unit trust scheme - ICTA s.469(7), drafting; subs.(5) unauthorised unit trust - ICTA ss.468(6) definition of "authorised unit trust", 469(1)(a); subs.(6)(a) - ICTA s.469(1); subs.(6)(b) - ICTA s.469(1)(a), (6A); subs.(7) - ICTA ss.469(7), (8), 828(1),(3), 832(1). _____________________________ Clause 6.4.3 1. This clause concerns amounts available for distribution to unit holders in unauthorised unit trusts. It derives from section 469 which deals with income from such unit trusts. The clause provides for such distributions to be charged to tax as annual payments. 2. Parts of section 469 are relevant to the unit trust itself rather than the individual investor. This clause aims to provide the individual investor regarded as receiving the annual payment with the necessary information to determine taxable income. We intend to rewrite the provisions relevant to the unit trust elsewhere. As the trustees of unauthorised unit trusts are chargeable to income tax this is likely to be in another part of this Act. 3. Subsection (2) contains a method statement setting out the steps to be taken to calculate the amount of income on which the individual investor is chargeable to tax. 4. Subsection (6) details the types of unauthorised unit trusts to which the clause does not apply. This is primarily of concern to the unit trust but we think that including this information here provides the investor with helpful information as to which types of unit trust are within the clause. 5. As we need to refer to various technical terms in this clause we think it is helpful to provide definitions, at subsections (4) and (5), even though these will have to be repeated in the provisions dealing with the unit trust. 6. When we come to write Chapter 3 (distributions) we will consider how to deal with the boundary between this Chapter and Chapter 3 in respect of unauthorised unit trust distributions. Return to Plan of Part 6 Exemption for payments under insurance policies 6.4.4 Health and employment insurance payments An annual payment under an insurance policy is exempt from income tax under this Part if- it is a benefit provided under so much of the policy as insures against a health or employment risk (see section 6.4.5), the policy meets the conditions in sections 6.4.6 to 6.4.9, so far as applicable to a policy of its description, and has throughout the period it has insured against that risk met the condition in section 6.4.7 (commercial risk). This is subject to the following qualification. A payment is not exempt if the whole or part of any premiums under the policy under which it is made has been deductible in calculating the insured's income for the purposes of income tax. For the meaning of the insured here, see- section 6.4.11 (meaning of the insured), and section 6.4.12 (policies for the benefit of others who contribute to premiums). _____________________________ Defined terms: health or employment risk - section 6.4.5. Origin: subs.(1) - ICTA s.580A(1)(a), (2), drafting; subs.(2) - ICTA s. 580A(6), drafting. _____________________________ Clause 6.4.4 1. 6.4.4 and the following eight clauses provide an exemption from income tax for benefits received from health or employment insurance policies. They derive from sections 580A and 580B. 2. The current legislation on such insurance policies deals with the Schedule D Case III, Schedule D Case V and Schedule E aspects all together. At this stage we have only rewritten the exemption for annual payments within Schedule D Case III. The legislation will have to be revisited to consider the Schedule E implications, and possibly again in the context of foreign income. Eventually, a single set of clauses could deal with all aspects of the exemption. It would then be included in Part 11, rather than Part 6. 3. Subsection (1) of this first clause exempts annual payments under insurance policies insuring against a "health risk" or an "employment risk". These labels are defined in 6.4.5, but are used here to give the user an early indication of what sort of policies are covered. They are more informative than the reference to "qualifying risk" used in the existing legislation. 4. Subsection (1)(b) signposts the four conditions which a policy must satisfy for the payments to be exempt. Two conditions, to be satisfied by all policies, are set out in 6.4.6 and 6.4.7. Two further conditions, relevant only in certain circumstances, are set out in 6.4.8 and 6.4.9. 5. Subsection (2) provides that benefits are not exempt if the insured was eligible for a tax deduction for some or all of the premiums. The current legislation at section 580A(6) refers to premiums which are deductible in the computation of the insured's income from any source; or from the insured's income. 6. The distinction is required because of the current classification system which charges tax by reference to Schedules and Cases. This clause does not therefore need to preserve that distinction. 7. The second sentence of subsection (2) provides a signpost to clauses about the meaning of "the insured". Return to Plan of Part 6 6.4.5 Health and employment risks and benefits For the purposes of sections 6.4.4 and 6.4.6 to 6.4.10, a policy insures against a health risk if it insures against the insured becoming or becoming in any specified way subject- to any physical or mental illness, disability, infirmity or defect, or to any worsening of any such illness, disability, infirmity or defect. For the purposes of those sections, a policy insures against an employment risk if it insures against circumstances arising as a result of which the insured ceases- to be employed or hold office, or to carry on any trade, profession or vocation carried on by him. For the purposes of this section and those sections, references to insurance against a risk include insurance providing for benefits payable (otherwise than by way of indemnity) if the circumstances insured against occur. _____________________________ Defined terms: the insured - sections 6.4.6, 6.4.12; trade - section 3.1.4. Origin: subs.(1) - ICTA s.580A(3)(a), new; subs.(2) - ICTA s.580A(3)(b), new; subs.(3) - ICTA s.580A(10). _____________________________ Clause 6.4.5 1. Subsection (1) defines "health risk" and subsection (2) defines "employment risk". They derive from section 580A(3)(a) and (b). 2. In the context of health risk, the current legislation refers to "any deterioration in a condition resulting from any physical or mental illness, disability, infirmity or defect". Without a reference to the deterioration, no exemption would be available for a health insurance policy taken out by a person who had a pre-existing condition and was insuring against the condition worsening. 3. This clause simply refers to "any worsening of any such illness, disability, infirmity or defect" and does not mention the "condition". Our view is that the only "condition" which could be in point would amount to an illness, disability, infirmity, or defect. So the removal of the reference to "condition" has no effect. We welcome views on whether our approach may have any adverse consequences. 4. Subsection (3), which derives from section 580A(10), expands on what is meant by "insurance against a risk". Benefits under this type of insurance are often not restricted to providing an indemnity against a particular liability. This subsection makes it clear that the exemption is also intended to cover benefits other than indemnities. Return to Plan of Part 6 6.4.6 Period for which payments must be made The policy may only provide for annual payments which relate to the health or employment risk to be made in respect of a period throughout which- the illness, disability, infirmity or defect the onset or worsening of which is insured against as a health risk continues, the unemployment or cessation in carrying on a trade, profession or vocation, resulting from circumstances insured against as an employment risk, continues, or as a result of circumstances insured against as a health or employment risk, the insured's income is less than it would otherwise have been. For the purposes of subsection (1)- an illness, disability, infirmity or defect is treated as continuing during a period of convalescence or rehabilitation related to it, and where a period within that subsection ends with the death of the insured, a period immediately following it is also within that subsection. For the purposes of subsection (1)(c), income from the policy is disregarded. _____________________________ Defined terms: employment risk, section 6.4.5; health risk, section 6.4.5; the insured - sections 6.4.6, 6.4.12. Origin: subs.(1)(a) - ICTA s.580A(2)(c), (4)(a), drafting, new; subs.(1)(b) - ICTA s.580A(2)(c), (4)(b), drafting, new; subs.(1)(c) - ICTA s.580A(2)(c), (4)(c), new, drafting; subs.(2)(a) - ICTA s.580A(4)(a), drafting; subs.(2)(b) - ICTA s.580A(4)(d); subs.(3) - ICTA s.580A(4)(c). _____________________________ Clause 6.4.6 1. This clause contains the first of the four conditions referred to in 6.4.4(1)(b). It must be satisfied by all health or employment insurance policies. It derives from section 580A(4) and restricts the period for which benefits may be paid if the exemption is to apply. 2. Subsection (1) says that the policy may only provide for payments to be made while the ill-health or unemployment continues; or while the insured's income is lower than it would otherwise have been, as a result of ill-health or unemployment. 3. The current legislation is ambiguous in certain respects. The first difficulty is that although section 580A(3) refers to deterioration of a pre-existing condition as being an acceptable "trigger" for an insurance benefit, section 580A(4)(a) does not specifically refer to deterioration. In practice, if the policy provides that payments will continue so long as the illness continues, even if there is a subsequent improvement in a person's condition, then these payments are not denied exemption. Subsection (1)(a) makes this clearer by adding a specific reference to worsening. This is a change in the law, but not the underlying policy. The change won't affect anyone's liability to income tax. 4. Section 580A(4)(b) refers to a period when the insured is unemployed "in circumstances insured against by the relevant part of the policy". Some of the circumstances referred to will, of course, apply at a particular point in time, while others will continue. In practice, section 580A(4)(b) is taken to refer to a period during which unemployment, resulting from circumstances insured against, continues. We have clarified this in subsection (1)(b). This is a change in the law, but not the underlying policy. The change won't affect anyone's liability to income tax. 5. Section 580A(4)(c) describes a period during which a person's income is lower "in circumstances so insured against". This is not particularly clear. In practice, section 580A(4)(c) is read as applying to both health and employment policies, and as covering any period during which the insured's income is lower as a result of the occurrence of ill-health or unemployment. We have clarified this in subsection (1)(c). This is a change in the law, but not the underlying policy. The change won't affect anyone's liability to income tax. 6. Subsection (2)(a) extends the period during which the ill-health continues to cover convalescence and rehabilitation. Subsection (2)(b) provides that payments which continue without a break following the death of the person in question may also be exempt. 7. Subsection (3) says simply that income from the policy is disregarded when considering whether a person's income is lower than it would otherwise have been. Although necessary, it is a somewhat obvious point and so has been put at the end of the clause. Return to Plan of Part 6 6.4.7 Commercial risk The policy must involve the insurer in commercial risk. Commercial risk here means the risk that a significant loss will be made on the premiums, taken together with any return on their investment. For this purpose- any provisions and any premiums which don't relate to the health or employment risk, and any reinsurance, are disregarded. _____________________________ Defined terms: employment risk, section 6.4.5; health risk, section 6.4.5. Origin: subs.(1) - ICTA s.580A(5); subs.(2) - ICTA ss.580A(5). _____________________________ Clause 6.4.7 1. This clause contains the second of the four conditions referred to in 6.4.4(1)(b). It must be satisfied by all health or employment insurance policies. It derives from section 580A(5) and provides that the policy must involve the insurer in genuine "commercial risk". Return to Plan of Part 6 6.4.8 Conditions to be met by policies with other benefits If the policy is a mixed policy, then, so far as the policy's terms relate to the health or employment risk, they may not be significantly different from what they would have been if the only benefits had been those relating to the health or employment risk, nor may the way in which they are given effect. Mixed policy here means a policy which provides for the payment of benefits which don't all relate to the health or employment risk. For the purposes of subsection (1)- a difference relating only to the reduction of benefits payable to or in respect of a person, because other benefits are payable to or in respect of him, is disregarded, and all the persons for whose benefit the policy provides insurance against the health or employment risk are to be considered. _____________________________ Defined terms: employment risk, section 6.4.5; health risk, section 6.4.5. Origin: subs.(1) - ICTA ss.580A(2)(b), 580B(2)(a), (b); subs.(2)(a) - ICTA s.580B(2)(c); subs.(2)(b) - ICTA s.580B(1). _____________________________ Clause 6.4.8 1. This clause contains the third of the four conditions referred to in 6.4.4(1)(b). It applies only where an insurance policy covers other risks, in addition to ill-health or loss of employment. Much of this clause derives from section 580B(2) and is aimed at preventing abuse of the exemption. 2. Subsection (1) requires a comparison between the terms of the policy in question, as they relate to ill-health or loss of employment, and the terms of a policy which insures only against those risks. If the terms, or the way they are given effect, are not "significantly different" then the condition is satisfied. 3. Subsection (2)(a) ensures that any difference in benefits payable for ill-health or loss of employment which arises just because other benefits are taken into account is not regarded as "significant". The existing legislation, at section 580B(2)(c), refers to benefits "receivable by or in respect of any person" which reduce other benefits "payable to or in respect of that person". There does not appear to be any significance in the change from "benefits receivable" to "benefits payable". Subsection (2)(a) refers to benefits "payable" throughout. 4. Subsection (2)(b) derives from section 580B(1), but is included here and repeated in the next clause, grouping all the considerations relating to each particular set of circumstances together in the appropriate clause. Return to Plan of Part 6 6.4.9 Conditions to be met where policies are linked If the policy is a linked policy, then so far as the terms of the policy relate to the health or employment risk, they may not be significantly different from what they would have been if no connected policies had been entered into, nor may the way in which those terms are given effect. For the purposes of subsection (1), the policy is a linked policy if the insured is or has been the insured under one or more other policies (connected policies) which have been in force at a time when the policy in question was in force or at the time immediately before it was entered into. For the purposes of subsection (1)- a difference relating only to the reduction of benefits payable to or in respect of a person under the linked policy, because benefits are payable to or in respect of him under any connected policies, is disregarded, and all the persons for whose benefit the policy in question provides insurance against the health or employment risk are to be considered. _____________________________ Defined terms: employment risk, section 6.4.5; health risk, section 6.4.5. Origin: subs.(1) - ICTA s.580B(3)(a),(c), drafting; subs.(2) - ICTA s.580B(3)(b), new; subs.(3)(a) - ICTA s.580B(3)(d); subs.(3)(b) - ICTA s.580B(1). _____________________________ Clause 6.4.9 1. This clause contains the last of the four conditions referred to in 6.4.4(1)(b). It applies only where a person is the insured under one or more other policies at the same time as, or immediately prior to, having insurance against ill-health or loss of employment. The clause derives from section 580B(3) and is aimed at preventing abuse of the exemption. 2. Subsection (1) requires a comparison between the terms of the policy in question, as they relate to ill-health or loss of employment, and the terms of a policy which insures against those risks in the absence of any other policy. If the terms, or the way they are given effect, are not "significantly different" then the condition is satisfied. 3. Subsection (2) contains definitions which apply specifically in the context of 6.4.9. 4. Subsection (3)(a) ensures that any difference in benefits payable for ill-health or loss of employment which arises just because benefits under another policy are taken into account is not regarded as "significant". The existing legislation, at section 580B(3)(d), refers to benefits "receivable by or in respect of any person" which reduce other benefits "payable to or in respect of that person". There does not appear to be any significance in the change from "benefits receivable" to "benefits payable". Subsection (3)(a) refers to benefits "payable" throughout. 5. Subsection (3)(b) derives from section 580B(1), but is included here, as in the previous clause, grouping all the considerations relating to each particular set of circumstances together in the appropriate clause. Return to Plan of Part 6 6.4.10 Aggregation of policies where employment ends for health reasons (1) Where payments are made- under a policy entered into under, or in accordance with, provisions contained in an employment policy, to or in respect of a person who has left employment in consequence of circumstances insured against by the employment policy as a health risk, and in accordance with rights which superseded any rights under the employment policy with effect from the time when it ceased to apply to him, those policies are treated as a single policy for the purposes of sections 6.4.4 to 6.4.7, this section and section 6.4.12. In this section- employment policy means a policy entered into wholly or partly for the benefit of the employees of an employer against a health risk; and employment includes an office, and employees and employer are to be read accordingly. _____________________________ Defined terms: health risk, section 6.4.5. Origin: subs.(1) (a)- ICTA s.580A(8)(c), drafting; subs.(1)(b) - ICTA s.580A(8)(a), (e), drafting; subs.(1)(c) - ICTA s.580A(8)(b); subs.(2) - ICTA ss.580A(8)(c), (e), drafting. _____________________________ Clause 6.4.10 1. This clause deals with the situation where a person leaves employment but continues to receive benefits under a new separate policy derived from a policy entered into for the benefit of employees. It derives from section 580A(8). 2. The effect of the clause is to ensure that, if the exemption applied to payments under the old policy, it will continue to apply to payments under the new policy. 3. Although this provision is mainly relevant to employment income chargeable under Schedule E, it may also be relevant for annual payments within this chapter, hence its inclusion here. Return to Plan of Part 6 6.4.11 Meaning of the insured In sections 6.4.4 to 6.4.6 the insured includes- the insured's spouse, and any person on whom any liabilities, which arise from an actual or proposed transaction identified in the policy, will fall jointly with the insured or the insured's spouse. In sections 6.4.5 and 6.4.6 the insured also includes any child under 21 of the insured or the insured's spouse. The meaning of the insured is also affected by section 6.4.12 (policies for the benefit of others who contribute to the premiums). _____________________________ Defined terms: health or employment risk - section 6.4.5. Origin: subs.(1)(a) - ICTA s.580A(9)(a); subs.(1)(b) - ICTA s. 580A(9)(b); subs.(2) - new; subs.(3) - drafting. _____________________________ Clause 6.4.11 1. This clause provides details of the meaning of "the insured" in various clauses relating to health or employment insurance. 2. The current legislation on health and employment insurance at sections 580A and 580B refers throughout to "the insured", although this term is not defined. During the Standing Committee debate on the Finance Bill introducing these provisions, the question whether the exemption extended to cover insurance policies taken out by parents on behalf of their children was considered. The written answer given by the Financial Secretary to the Treasury was that in this case the child would be "the insured" so that the exemption could apply. In practice the exemption has been treated as applying to payments under such policies. In the light of this, subsection (2) has been added to put the matter beyond doubt. This addition is a change in the law, but not the underlying policy. It won't affect anyone's liability to tax. Return to Plan of Part 6 6.4.12 Policies for the benefit of others who contribute to premiums Where a policy is taken out by one person wholly or partly for the benefit of another, who pays the whole of the premiums, the other person is treated as the insured for the purposes of sections 6.4.4 to 6.4.11. Where a policy is taken out by one person wholly or partly for the benefit of another, who contributes to the premiums, for the purpose of determining whether the part of the annual payments justly and reasonably attributable to the contributions is exempt under section 6.4.4- for the purposes of sections 6.4.4 to 6.4.11 the other person is treated as the insured, and for the purposes of section 6.4.4(2) (which disapplies the exemption where premiums have been deductible in calculating the insured's income), payments or contributions not made by the other person are disregarded. _____________________________ Defined terms: Origin: subs.(1) - ICTA s.580A(7)(a), (c), drafting; subs.(2) - ICTA s.580A(7)(a), (c), drafting. _____________________________ Clause 6.4.12 1. This clause deals with the situation where one person takes out a health or employment insurance policy for the benefit of another. It derives from section 580A(7). 2. Section 580A(7) deals with two different situations together the other person pays the whole of the premiums; and the other person contributes to the premiums. 3. The apportionment of benefits referred to in section 580A(7) is, however, only relevant in the second situation. This clause therefore deals with each situation separately. 4. Subsection (1) provides that where a policy is taken out by one person for the benefit of another person, and that other person pays the premiums, that other person is treated as the insured. Subsection (2) provides that someone who contributes to the premiums is treated as the insured to the extent of their contributions. 5. One effect of the "other person" being treated as the insured is that relief for the benefits is only denied by 6.4.4(2) if that other person has been eligible for relief for the payments. Relief is not denied because some other person has been eligible for relief for his share of the payments. This point is now clarified in subsection (2)(b). 6. The existing legislation is drafted in terms of the benefits under the policy being apportioned. This clause is drafted instead in terms of annual payments, in order to be consistent with the other clauses dealing with this exemption. We believe that this does not alter the effect of this provision. Return to Plan of Part 6 Exemption for personal injury damages etc. 6.4.13 Personal injury damages and compensation payments The following payments are exempt from income tax- periodical payments of damages for personal injury, or an interim payment in an action for such damages, under a court order or an agreement settling a claim or action for such damages or for such a payment, annuity payments made under an annuity purchased or provided by the person by whom payments within paragraph (a) would otherwise fall to be made, in discharge of his liability to make those payments, annuity payments made under an annuity purchased or provided under an award of compensation made under the Criminal Injuries Compensation Scheme (a compensation award), and sums paid- to or for the benefit of the person who is entitled to damages or an interim payment under an order or agreement within paragraph (a) or compensation under a compensation award (the injured person), by the trustees of a trust, under which during his lifetime he is the only beneficiary, out of payments within paragraph (a), (b) or (c) which are received by them on trust for him. This is subject to the following qualification. Only the following persons are entitled to the exemptions under subsection (1)(a) to (c)- the injured person, a person who receives payments under the order agreement or award on behalf of the injured person. If the Treasury consider that this section should apply or should apply with modifications to periodical payments by way of compensation for personal injury, for which provision is made under any scheme or arrangement (whether statutory or not), they may provide that it does so by order made by statutory instrument. A statutory instrument containing such an order is subject to annulment in pursuance of a resolution of the House of Commons. In this section- personal injury includes disease and impairment of physical or mental condition; claim or action for personal injury includes a claim or action in respect of a person's death from personal injury; the Criminal Injuries Compensation Scheme means- the scheme established by arrangements made under the Criminal Injuries Compensation Act 1995, and arrangements made by the Secretary of State for compensation for criminal injuries in operation before the commencement of that scheme. _____________________________ Defined terms: Origin: subs.(1)(a) - ICTA s.329AA(1), (7), drafting; subs.(1)(b) - ICTA ss.329AA(3), drafting; subs.(1)(c) - ICTA s.329AB(1); subs.(1)(d) - ICTA s.329AA(4), drafting; subs.(2) - ICTA ss.329AA(1), (2)(a), (b), (7), 329AB(1) drafting; subs.(3) - ICTA ss.329AB(3), new, 828(1), (3) ; subs.(4) personal injury - ICTA s.329AA(5); subs.(4) claim or action for personal injury - ICTA s.329AA(6), drafting new; subs.(4) the Criminal Injuries Compensation Scheme - ICTA s.329AB(2). _____________________________ Clause 6.4.13 1. This clause provides an exemption from income tax for periodical payments in respect of damages for personal injury. It derives from sections 329AA and 329AB. 2. Section 329AA(6) sets out a list of non-tax statutory provisions for claims and actions which are covered by the section. However, the list is not exhaustive, the intention being to exempt from tax all periodical payments irrespective of the provision under which the claim or action is brought. In view of this there seems little point in repeating the list of non-tax statutory references and we have not done so. This follows the approach we have taken for interest on damages at 6.2.9(1)(a) and (b). The change removes unnecessary material. It won't affect anyone's liability to income tax. 3. Section 329AA(4) provides that certain payments paid by trustees to, or for the benefit of, the person entitled to the damages are not regarded as income of that person. However, the subsection does not go so far as to exempt the persons mentioned in subsection (2)(b), ie the person receiving the payment on behalf of the person entitled. We understand that is not the policy behind section 329 and the clause provides an exemption to a person receiving payments from trustees for the benefit of the person entitled. This is a change to the law but not to the policy. This minor change will favour the taxpayer. 4. Section 329AA(2)(c) exempts periodical payments received by trustees. As we are concerned at present only with the savings and investment income of individuals we have left this exemption, and any possible charge to tax on trustees who may be outside the exemption, to be dealt with elsewhere in the Income Tax Act. 5. Section 329AA(6) contains a reference to the Fatal Accidents Act. As such, damages in respect of a person's death are covered by the exemption. As we are removing the list of statutes we make it clear in subsection (4) that a claim for action for personal injury includes a claim for action in respect of a person's death. Return to Plan of Part 6 Partial exemption for purchased life annuities 6.4.14 Exemption for part of annuity payments under purchased life annuities Each annuity payment made under a purchased life annuity is exempt from income tax under this Chapter to the extent provided under section 6.4.17 for an annuity of its description. This is subject to the qualification in section 6.4.16 (excluded annuities). The exemption under this section requires a claim to the Board. _____________________________ Defined terms: the Board, section 1.1.3; purchased life annuity, section 6.4.15. Origin: subs.(1) - ICTA s.656(1), drafting; subs.(2) - SI 1956/1230 reg. 4 _____________________________ Clause 6.4.14 1. 6.4.14 to 6.4.22 provide an exemption from income tax for the capital element of purchased life annuities. They derive from sections 656 to 658. 2. Early case law established that the whole of an annuity payment received by an annuitant was chargeable to income tax (see, for example, the judgement of the Lord President (Inglis) in Coltness Iron Co v Black, (1881) 1 TC 287, 308, which was cited with approval by Lord Wilberforce in CIR v Church Commissioners for England, (1976) 50 TC 516, 566(1)). Accordingly, there is a contrast between income tax law (where the whole of the payment is regarded as taxable income) and the commercial world (where a part of the payment is regarded as a return of capital). 3. In 1954 the Report of the Committee on the Taxation Treatment of Provisions for Retirement (Cmd. 9063) recommended changing the law so that only the income element in an annuity payment should be charged to income tax. Sections 27 and 28 Finance Act 1956 therefore provided for purchased life annuities to be regarded as containing both an income element (chargeable to income tax) and a capital element (not chargeable to income tax). The 1956 legislation, with subsequent amendments, now appears as sections 656 to 658. 4. This clause exempts from income tax a part - the capital element - of an annuity payment made under a purchased life annuity. (Annuities taxed under another part of the Act, such as Part 7 Pension income, are outside the scope of the clause.) 5. Subsection (1) sets out the exemption and makes it clear that only a part of each annuity payment may be exempt. It provides a signpost to 6.4.17 which explains how to work out how much of any annuity payment is exempt. 6. Subsection (2) indicates that a claim needs to be made to the Board. At present the requirement for a claim appears only in the secondary legislation supporting sections 656 to 658 (regulation 4, SI 1956 No 1230, as amended). It is unhelpful to have the claim provision separated from the provisions setting out the exemption itself. We have therefore promoted it to primary legislation. That will change the status of the provision as it will no longer be possible to change it or revoke it through further regulations. This is a change to the law but not to the policy. The change won't affect anyone's liability to income tax. (1) [1976] STC 339, 343 Return to Plan of Part 6 6.4.15 Meaning of purchased life annuity In this Chapter purchased life annuity means an annuity- granted for consideration in money or money's worth in the ordinary course of a business of granting annuities on human life, and payable for a term ending at a time ascertainable only by reference to the end of a human life. For this purpose it does not matter that the annuity may in some circumstances end before or after the life. _____________________________ Defined terms: Origin: para.(a) - ICTA s.657(1) definition of "purchased life annuity"; para.(b) - ICTA s.657(1) definition of "life annuity". _____________________________ Clause 6.4.15 1. This clause rewrites the definition of "purchased life annuity" currently in section 657(1). Return to Plan of Part 6 6.4.16 Excluded annuities Section 6.4.14(1) does not apply to the following annuities- an annuity the whole or part of the consideration for which consisted of sums satisfying the conditions for relief under- section 266 of the Income and Corporation Taxes Act 1988 (life assurance premiums), or section 273 of that Act (payments securing annuities); an annuity purchased- following a direction in a will, or to provide for an annuity payable by virtue of a will or trust out of income of property disposed of by the will or trust (whether or not capital could also be used); an annuity purchased by any person in recognition of another's services in any office or employment. _____________________________ Defined terms: Origin: para. (a) - ICTA s.657(2)(b); para. (b) - ICTA s.657(2)(c); para. (c) - ICTA s.657(2)(d). _____________________________ Clause 6.4.16 1. In our boundary provisions in Chapter 6.1, we have provided for the charge to income tax on both employment income (Part 4) and pension income (Part 7) to have priority over the charge to income tax on savings and investment income (see 6.1.3(1)). Accordingly, the exemption in 6.4.14(1) does not apply to annuities which fall to be taxed under some other part of the Act. Nor, of course, does it apply to annuities which are not purchased life annuities within the definition in 6.4.15. 2. This clause rewrites section 657(2), which sets out the annuities to which section 656 does not apply. Some of the annuities referred to are already excluded from the exemption in 6.4.14(1) by the action of our boundary provisions. The clause therefore needs to list only those annuities which remain to be excluded. 3. Section 657(2)(a) appears to be designed to exclude annuity payments which, on the analysis in Perrin v Dickson, (1924) 14 TC 608, represent interest together with capital repayments. However, it seems that contracts of this type don't give rise to annual payments taxable under Part 6 and section 657(2)(a) is otiose. We have therefore removed this unnecessary material. This change in the law won't affect anyone's liability to income tax. 4. For the moment we have not considered the position of purchased life annuities giving rise to annuity payments which would fall to be charged to income tax as foreign income. Return to Plan of Part 6 6.4.17 Extent of exemption under s.6.4.14 Where the amount of the annuity payments under the annuity does not depend on a contingency other than the duration of a human life or lives (a non-life contingency), the same proportion of each payment (the exempt proportion) is exempt. Where that amount does depend on a non-life contingency, each payment is exempt if it does not exceed a fixed sum (the exempt sum). If it does exceed it, tax is chargeable on the excess. If it is less, the shortfall is added to the exempt sum for the next payment (and so on). The ways to determine the exempt proportion and the exempt sum differ according to whether or not the annuity's term depends on a non-life contingency (in addition to the duration of a human life or lives). Where the annuity's term does not depend on a non-life contingency- the exempt proportion is determined as set out in section 6.4.18, and the exempt sum is determined as set out in section 6.4.19. Where the annuity's term does depend on a non-life contingency- the exempt proportion is the proportion which is just, having regard to the contingencies affecting the annuity and to section 6.4.18, and the exempt sum is the amount which is just, having regard to the contingencies affecting the annuity and to section 6.4.19. _____________________________ Defined terms: Origin: subs.(1) - ICTA s.656(3)(a), (c), (d), drafting; subs.(2) - ICTA s.656(2), (3)(e), ESC A46, new, drafting; subs.(3) - drafting; subs.(4) - drafting; subs.(5)(a) - ICTA s.656(3)(d), drafting; subs.(5)(b) - ICTA s.656(3)(e), new, drafting. _____________________________ Clause 6.4.17 1. This clause explains how to work out how much of any annuity payment is exempt. The way in which the exempt part is calculated varies according to the type of annuity involved. Current legislation is very jumbled and can be considerably improved by distinguishing clearly the various cases and dealing with them separately. 2. By definition (see 6.4.15) the term of every purchased life annuity is dependent on the duration of a human life. The amount of the annuity payment may also be dependent on the duration of a human life. However, either - or both - might also be dependent on some other contingency. 3. Subsections (1) and (2) show how there are two basic methods for calculating how much of any annuity payment is exempt. Which one to apply is determined by whether or not the amount of the annuity payment depends on some on some other contingency - a "non-life contingency". Where the amount of the payment does not depend on a non-life contingency - subsection (1) - a constant proportion of each payment is exempt. Where the amount does depend on a non-life contingency - subsection (2) - a constant sum is exempt (assuming the period covered by each payment is the same). 4. Under the type of annuity covered by subsection (2) it is possible for the exempt sum to exceed the amount of a particular annuity payment. (See the commentary on 6.4.19.) Extra-Statutory Concession A46 deals with this situation by allowing any excess of the exempt amount over the gross annuity to be carried forward and added to the exempt part of the next payment. The third sentence of subsection (2) legislates Extra-Statutory Concession A46. This is a change to the law, but not to the underlying policy. The change is in favour of the taxpayer. 5. Next, subsection (3) indicates that the application of both the exempt proportion and the exempt sum methods of calculation may be affected by whether or not the term of the annuity depends on a non-life contingency. 6. Under virtually all purchased life annuities the term of the annuity does not depend on a non-life contingency. Subsection (4) applies the constant proportion and constant sum methods of calculation to these annuities and points the way to the two provisions containing details of the methods. 7. Subsection (5) explains how to calculate the exempt part of each annuity payment where, very unusually, the annuity's term does depend on a non-life contingency. It too applies the constant proportion and constant sum methods of calculation, but taking account also of the additional contingency. 8. Where the amount of the annuity payments does not depend on a non-life contingency, subsection (5)(a) provides that the exempt part is such proportion as is just, having regard to the contingencies affecting the annuity and the constant proportion method used for annuities within subsection (4)(a). 9. Similarly, where the amount of the annuity payments does depend on some non-life contingency, subsection (5)(b) provides that the exempt element is such amount as is just, having regard to the contingencies affecting the annuity and to the constant sum method used for annuities within subsection (4)(b). 10. At present, section 656(3)(b) and (e) provides for the exempt element part of such annuities to be computed as a constant proportion. However, actuarial techniques don't lend themselves to that type of calculation for an annuity with these characteristics. We propose therefore to change the law to apply the constant sum method. And because it will be possible for the amount of the exempt part to exceed the amount of a particular annuity payment we also propose to extend the legislated Extra-Statutory Concession A46 to deal with the situation. This allows the excess to be carried forward and added to the exempt part of the next payment. 11. This is a change to the law and to the underlying policy. However, this type of annuity has not been met in practice and remains no more than a hypothetical possibility. Theoretically the change is in favour of the taxpayer. 12. We welcome comments on the way we have dealt with the different types of purchased life annuities. Return to Plan of Part 6 6.4.18 Exempt proportion: term not dependent on non-life contingency In the case of an annuity within section 6.4.17(4)(a) (term not dependent on a non-life contingency), the exempt proportion is such proportion of the annuity payment as the purchase price of the annuity bears to the actuarial value of the annuity payments. To calculate that proportion, use the following formula- AP x PP ----- AV where- AP is the annuity payment, PP is the purchase price of the annuity, and AV is the actuarial value of the annuity payments. The purchase price of the annuity is the total amount or value of the consideration given for the annuity. Section 6.4.20 contains rules about that consideration. The actuarial value of the annuity payments is their value at the date when the first of the payments begins to accrue. It is determined- by reference to tables of mortality prescribed under section 6.4.22, taking the age at that date of a person during whose life the annuity is payable as his age in whole years on that date, and without discounting any payment for the time to elapse before it is payable. This is subject to the following qualification. If it is not possible to determine that actuarial value by reference to those tables, it is such amount as may be certified by the Government Actuary or the Deputy Government Actuary. _____________________________ Defined terms: purchased life annuity, section 6.4.15. Origin: subs.(1) - ICTA s.656(3)(a), (c), drafting; subs.(2) - ICTA s.656(3)(a), (c), drafting; subs.(3) - ICTA s.656(4)(c), (7)(b), new, drafting; subs.(4) - ICTA s.656(9). _____________________________ Clause 6.4.18 1. This clause sets out the method for calculating the exempt part of each annuity payment for the most common type of annuity where the term of the annuity does not depend on any contingency other than the duration of a human life or lives, and the amount of the annuity payments does not depend on any contingency other than the duration of a human life or lives. 2. Under this type of annuity the amount of the annuity payment may change, but only in a pre-determined way. For example, the amount may increase by a fixed percentage at set intervals or, if written on two lives, may reduce on the first death. The method of calculation computes the exempt part as a constant proportion of each annuity payment and thus caters for increases and decreases in the amount of the annuity payments. In subsection (1) we have set out the method both in words and as a formula. Is our dual approach helpful? 3. Subsection (2) indicates that rules about the consideration paid for the annuity are to be found in 6.4.20. 4. The legislation does not set out how the actuarial value is to be calculated. However, subsection (3) ensures a consistent approach by indicating when the value is to be calculated and requiring that the same tables of mortality are always used (the tables prescribed by the regulations are those "comprised in Table A8 set out in Appendix A on pages 113 to 115 of the booklet entitled "Continuous Mortality Investigation Reports Number 10" published by the Institute of Actuaries and the Faculty of Actuaries in 1990" (regulation 6, SI 1956 No 1230, as amended)); the age of the person during whose life the annuity is payable is taken as a whole number of years; and no discount is given in arriving at the present value of a future payment. 5. Under the current legislation, the age of the person during whose life the annuity is payable is determined by reference to his last birthday before the date of the calculation (section 656(7)). If the calculation is to be made on the individual's birthday his age is, in strictness, that on his previous birthday. However, current Revenue practice follows actuarial practice in basing the calculation on the age attained that day. This produces a higher figure for the exempt element. 6. Subsection (3)(b) reflects this practice. This is a change to the law but not to the policy. Theoretically the change is in favour of the taxpayer. 7. In some situations the range of the prescribed tables of mortality may be insufficient to provide the data needed to calculate the actuarial value. For example, they contain no data for ages of less than 16. Subsection (4) provides for the value to be determined in these circumstances by the Government Actuary or the Deputy Government Actuary. Return to Plan of Part 6 6.4.19 Exempt sum: term not dependent on non-life contingency In the case of an annuity within section 6.4.17(4)(b) (term not dependent on a non-life contingency), the exempt sum is such proportion of the purchase price of the annuity as the period in respect of which the annuity payment is made bears to the expected term of the annuity. To calculate that sum, use the following formula- PP x 1 x PM ---- ---- TY 12 where- PP is the purchase price of the annuity, TY is the expected term of the annuity in years (and any odd fraction of a year), and PM is the period in months (and any odd fraction of a month) in respect of which the payment is made. The purchase price of the annuity is the total amount or value of the consideration given for the annuity. Section 6.4.20 contains rules about that consideration. The expected term of the annuity is the period from the date when the first annuity payment begins to accrue to the date when it is expected that the last payment will become payable. It is determined- as at the date when the first annuity payment begins to accrue, by reference to tables of mortality prescribed under section 6.4.22, and taking the age at that date of a person during whose life the annuity is payable as his age in whole years on that date. This is subject to the following qualification. If it is not possible to determine that period by reference to those tables, it is such period as may be certified by the Government Actuary or the Deputy Government Actuary. _____________________________ Defined terms: purchased life annuity, section 6.4.15. Origin: subs.(1) - ICTA s.656(2), drafting; subs.(2) - ICTA s.656(2)(a)(i), drafting. subs.(3) - ICTA s.656(2)(a)(ii), (7)(a), new, drafting; subs.(4) - ICTA s. 656(8). _____________________________ Clause 6.4.19 1. This clause sets out the method for calculating the exempt part of each annuity payment where the term of the annuity does not depend on any contingency other than the duration of a human life or lives, but the amount of the annuity payments does depend on some contingency other than the duration of a human life or lives. 2. Under this type of annuity the amount of the annuity payment may change in an unpredictable way (see paragraph 3 below). The formula in subsection (1) therefore calculates the exempt part of each annuity payment as a constant sum, rather than as a constant proportion of the payment. (As changes in the amount of the annuity payments are unpredictable any actuarial valuation of them would be virtually impossible.) The size of the sum takes into account the expected term of the annuity. We welcome comments on the way we have presented the formula. 3. An example of an annuity of this type is an index linked annuity where the amount of the annuity fluctuates with movements in the Retail Prices Index. Initially the return under this type of annuity is low and the gross annuity may fall short of the amount of the constant exempt sum. With inflation the amount of the annuity payments is likely to rise and in due course to overtake the amount of the exempt sum. Extra-Statutory Concession A46 deals with this situation by allowing any excess of the exempt amount over the gross annuity to be carried forward and added to the exempt part of the next payment. 6.4.17(2) legislates Extra-Statutory Concession A46. 4. Subsection (2) indicates that rules about the consideration paid for the annuity are to be found in 6.4.20. 5. The term of the annuity can only be predicted by an actuarial calculation. Subsection (3) ensures a consistent approach by indicating the date from which the term starts to run and requiring that the term is determined as at that date; the same tables of mortality are always used (the tables prescribed by the regulations are the same as those used in calculating the actuarial value of annuity payments); and the age of the person during whose life the annuity is payable is taken as a whole number of years. 6. Under the current legislation, the age of the person during whose life the annuity is payable is determined by reference to his last birthday before the date of the calculation (section 656(7)). If the calculation is to be made on the individual's birthday his age is, in strictness, that on his previous birthday. However, current Revenue practice follows actuarial practice in basing the calculation on the age attained that day. This produces a higher figure for the exempt element. 7. Subsection (3)(c) reflects this practice. This is a change to the law but not to the policy. Theoretically the change is in favour of the taxpayer. 8. In some situations the range of the prescribed tables of mortality may be insufficient to provide the data needed to calculate the expected term of the annuity. For example, they contain no data for ages of less than 16. Subsection (4) provides for the expected term to be determined in these circumstances by the Government Actuary or the Deputy Government Actuary. Return to Plan of Part 6 6.4.20 Consideration for the grant of annuities For the purposes of sections 6.4.18 and 6.4.19, consideration given both for an annuity and for some other matter is to be apportioned in such way as is just. But for this purpose a right to a return of premiums or of other consideration for an annuity is not treated as another matter. Where it appears that the amount or value of the consideration nominally given for an annuity affected, or was affected by, the consideration given for some other matter, their aggregate amount or value- is to be treated as one consideration given for both, and is to be apportioned under subsection (1). _____________________________ Defined terms: Origin: subs.(1) - ICTA s.656(2)(d), (4)(a); subs.(2) - ICTA s.656(2)(d), (4)(b). _____________________________ Clause 6.4.20 1. This clause contains rules to deal with the situation where the purchase of the annuity is part of a composite transaction. It provides for the whole consideration to be apportioned into consideration given for the annuity and consideration relating to anything else. 2. Capital protected annuities, which provide for the return on death of the purchase consideration less the annuity payments made to date, could be regarded as a composite of an annuity and a life insurance. Under subsection (1) the consideration given for a capital protected annuity is treated as given for the annuity alone. Return to Plan of Part 6 6.4.21 Determinations Any question- whether an annuity is a purchased life annuity to which section 6.4.14 applies, or how much of an annuity payment is exempt, is to be determined by the Inland Revenue. A person aggrieved by the Inland Revenue's determination may appeal to the Special Commissioners. If a person making a payment under an annuity- has been given notice of such a determination in the way prescribed under section 6.4.22, and has not been notified of any alteration of it, the determination is conclusive for determining the amount of income tax he may or must deduct from it or for which he is chargeable in respect of it. But if a person making an annuity payment under a purchased life annuity to which section 6.4.14 applies has not been given notice in the way prescribed under section 6.4.22 of the amount which is exempt, the amount of income tax he may or must deduct or for which he is chargeable is the amount it would be if none of the payment were exempt. A person who knowingly makes any false statement or false representation for the purpose of obtaining any exemption from or repayment of tax for any person under sections 6.4.14 to 6.4.20 or this section is liable to a penalty not exceeding £3,000. _____________________________ Defined terms: the Income Tax Acts, ICTA s.831(1)(b); the Inland Revenue, section 1.1.3; purchased life annuity, section 6.4.15. Origin: subs.(1) - ICTA s.658(1), new; subs.(2) - ICTA s.656(5); subs.(3) - ICTA s.656(6); subs.(4) - ICTA s.658(5). _____________________________ Clause 6.4.21 1. The exemption given by 6.4.14 requires a claim to be made. This allows the Revenue to determine whether an annuity is a purchased life annuity and the amount of any annuity payment which is exempt. This clause deals with the determination of those questions and the consequences for deduction of tax. 2. Subsection (1) says that the questions are to be determined by the Inland Revenue and provides for appeals against determinations to go to the Special Commissioners. 3. Where we have referred to determinations being made by "the Inland Revenue" the current legislation refers to "the inspector". And more recent legislation refers to functions being exercised by "an officer of the Board" (for example, in section 524(2)). As the class of people - other than the Board itself - entitled to exercise statutory functions covers the whole of the Inland Revenue, subject to restrictions by "administrative practice", it seems more straightforward to say simply that such functions may be exercised by the Inland Revenue. 4. Under subsection (2) the payer of an annuity payment is entitled to rely on a determination, made and notified by the Inland Revenue, in deducting tax from any part of an annuity payment which is not exempt. Similarly, under subsection (3), where no proper notice of determination of the exempt amount has been given the payer may rely on its absence in deducting tax from the whole of the annuity payment. 5. Subsection (4) imposes a specific penalty on any attempt to obtain the exemption falsely. Return to Plan of Part 6 6.4.22 Regulations The Board may by regulations- prescribe the procedure to be used in giving effect to sections 6.4.14 to 6.4.20 where no provision is made in those sections, apply any provision of the Income Tax Acts, with or without modifications, for the purposes of those sections or the regulations, and prescribe tables of mortality for the purposes of sections 6.4.18(3) and 6.4.19(3). The regulations may, in particular, make provision about- the time limit for making a claim for exemption from tax under section 6.4.14 or any consequential repayment of tax, the information to be provided in connection with the determination of the questions mentioned in section 6.4.21(1) and the persons who may be required to provide it, the way in which such a determination is to be notified to the person making the annuity payments, the way in which such a determination is to be given effect and the making of assessments for that purpose on the person entitled to the annuity, the extent to which such a determination is to be binding and the circumstances in which it may be reviewed, and the time limit for appealing against such a determination. Paragraph (d) applies despite anything in section 348 of the Income and Corporation Taxes Act 1988 (charges on income). Regulations under this section are to be made by statutory instrument. A statutory instrument containing such regulations is subject to annulment in pursuance of a resolution of the House of Commons. _____________________________ Defined terms: the Board, section 1.1.3; the Income Tax Acts, ICTA s.831(1)(b). Origin: subs.(1)(a) - ICTA s.658(2); subs.(1)(b) - ICTA s.658(3); subs.(1)(c) - ICTA ss. 656(2)(a)(ii), (4)(c), 658(3); subs.(2)(a) - ICTA s.658(4); subs.(2)(b) - ICTA s.658(4)(a); subs.(2)(c) - ICTA ss.656(5),(6), 658(4)(b); subs.(2)(d) - ICTA s.658(4); subs.(2)(e) - ICTA s.658(1); subs.(2) second sentence - ICTA s.658(4)(b); subs.(3) - ICTA s.828(1); subs.(4) - ICTA s.828(3). _____________________________ Clause 6.4.22 1. This clause contains powers for the Board of Inland Revenue to make regulations for dealing with purchased life annuities. It rewrites equivalent provisions in sections 656 and 658. 2. Subsection (1) covers three general matters prescribing the procedures to be used; applying provisions of the Income Tax Acts (modified if appropriate); and prescribing the tables of mortality referred to in 6.4.18 and 6.4.19. 3. Subsection (2) lists some particular matters which may be dealt with in the regulations. 4. For the moment we have set out here (subsections (3) and (4)) the method for making the regulations - statutory instrument subject to the negative resolution procedure - but that won't be required if a provision equivalent to section 828 is included in the Income Tax Act. Return to Plan of Part 6 Exemptions for certain maintenance payments 6.4.23 Restricted exemptions for maintenance payments under pre-15th March 1988 obligations Section 6.8.4 (annual payments by individuals) wholly exempts maintenance payments made under pre-15th March 1988 obligations, subject to the conditions in section 6.8.8. This section contains two further exemptions, which may apply to payments not meeting those conditions. For the meanings of maintenance payments and pre-15th March 1988 obligation, see section 6.8.8(3) and (4). If the aggregate amount of the maintenance payments made under a pre-15th March 1988 obligation in any tax year exceeds the aggregate amount of 1988-89 payments by the same payer, the excess is exempt from income tax. 1988-89 payments here means maintenance payments made under a pre-15th March 1988 obligation which- formed part of the same recipient's income for the year 1988-89, and were chargeable to tax under Case III or V of Schedule D. Recipient includes a party to a marriage for whose benefit payments are made by the other party. If the aggregate amount of the maintenance payments made under pre-15th March 1988 obligations in any tax year, which meet the conditions in subsection (4), does not exceed the married couple's allowance for the year, they are exempt from income tax. If the aggregate amount of those payments exceeds that allowance, tax is charged on the excess. This exemption requires a claim to be made. The conditions are that the payments are- made by one of the parties to a marriage- to or for the benefit and for the maintenance of the other party, or to the other party for the maintenance by the other party of any child of the family, and due at a time when the other party has not remarried. If both subsections (2) and (3) apply, subsection (2) applies first and subsection (3) applies as if the aggregate amount of the payments were reduced by the amount exempted under subsection (2). _____________________________ Defined terms: child of the family, section 6.4.28(2); maintenance payment, section 6.8.8(3); marriage, section 6.4.28(1); married couple's allowance, section 6.4.28(1); pre-15th March 1988 obligation, section 6.8.8(4); tax year, section 1.1.1. Origin: subs.(1) - drafting; subs.(2) - Finance Act 1988 ss.38(1), (4), 40(1); subs.(3) - Finance Act 1988 s.38(5); subs.(4) - Finance Act 1988 s.38(6); subs.(5) - Finance Act 1988 s.38(5). _____________________________ Clause 6.4.23 1. This clause provides two limited exemptions for certain maintenance payments made under pre-15th March 1988 obligations which are excluded from the general exemption in 6.8.4 because they don't fulfil the further conditions in 6.8.8. It derives from sections 38 and 40 Finance Act 1988. Before the changes in 1988, maintenance payments were taxable. These two exemptions take payments made under pre-15th March 1988 obligations closer to the position of payments made under subsequent obligations which are wholly exempt. 2. Subsection (2) sets out the first exemption. The maintenance payments are exempt to the extent that they exceed, in any tax year, the amount of maintenance payments on which the recipient was taxable in 1988-89. 3. Subsections (3) and (4) set out the second exemption. The maintenance payments, including those made for the benefit of a "child of the family", are exempt to the extent that they don't exceed the married couple's allowance. This exemption applies only if the recipient has not remarried. Subsection (3)(b) does not reproduce the requirement in section 38(6)(c)(i) Finance Act 1988 that the parties should not be a married couple living together. This is not needed because 6.8.4(1) and (2) already exempts payments between a married couple living together. 4. Where maintenance payments fall within both exemptions, subsection (5) gives the exemption in subsection (2) priority. 5. A pre-15th March obligation is defined in 6.8.8(4) and (5). 6. The commentary on 6.8.8 includes a flowchart summarising the effects of both 6.8.8 and 6.4.23. Return to Plan of Part 6 Deduction of tax and grossing up 6.4.24 Payments received after deduction of tax Income tax deducted under one of the following sections from an annual payment within this Chapter is treated as income tax paid by the recipient- section 348(1)(b) of the Income and Corporation Taxes Act 1988 (under which income tax may be deducted from some payments by the payer), section 349(1)(a) of that Act (under which income tax must be deducted from some payments by the payer). _____________________________ Defined terms: Origin: ICTA ss. 348(1)(d), 349(1), new. _____________________________ Clause 6.4.24 1. This clause deals with the position of an individual receiving an annual payment which is a "charge on income" after tax has been deducted. (As explained earlier, we expect the rules under which tax is deducted from certain payments will be put in a separate part of the Act dealing generally with deduction of tax.) 2. Under section 348(1)(b) "a sum representing the amount of income tax thereon" may be deducted from certain annual payments. Subsection (1) of the clause reproduces section 348(1)(d) under which the sum is treated as income tax paid by the person to whom the payment is made. This is part of the ancient scheme for "charges on income" whereby part of the payer's income - the amount of the "charge" on it - is regarded not as income of the payer but as income of the recipient. The payer is entitled, but not obliged, to deduct and retain out of the annual payment this sum representing tax, which is treated as tax paid by the recipient of the payment. 3. We have made the scope of the provision more explicit. Section 348(1)(d) applies in terms only for annual payments from which any deduction is made under section 348(1)(b), but case law extends it to payments under section 348(2) and section 349. (See Allchin v Corporation of South Shields, (1943) 25 TC 445, particularly Viscount Simon LC at 461, Stokes v Bennett, (1953) 34 TC 337, and Grosvenor Place Estates v Roberts, (1960) 39 TC 433.) We are filling this gap currently filled by case law. This is a change in the statute, but not in the underlying law. The change won't affect any taxpayer's liability to income tax. 4. We have not reproduced section 348(1)(c) which obliges the recipient of the payment to allow the deduction and accept that the "charge" has been met in full by the payer. The first aspect of that provision is covered by section 106 Taxes Management Act 1970. The second aspect relates to the position of the payer and, if required, will be dealt with when the rules for deduction of tax are rewritten. 5. The tax treated as paid by the recipient of the annual payment is taken into account, along with any other tax paid by deduction at source and any tax credits, in calculating the tax payable for the tax year. Return to Plan of Part 6 6.4.25 Grossing up of discretionary payments from trusts A payment made by trustees to any person in the exercise of a discretion is treated as paid after the deduction of income tax at the rate applicable to trusts for the tax year in which the payment is made, if either of the conditions in subsection (2) is met. Tax is charged on the gross amount of the payment. The gross amount is the amount of the payment grossed up by reference to that rate. Those conditions are- that the payment is treated as that person's income for all purposes of the Income Tax Acts and would not be his income if it were not paid to him, and that the payment is treated as the settlor's income for those purposes by section 660B of the Income and Corporation Taxes Act 1988 (payments to settlor's unmarried minor children). Where subsection (2)(a) applies, the income tax is treated as paid by the person to whom the payment is made. Where subsection (2)(b) applies, the income tax is treated as paid by the settlor. (5) In this section- discretion includes a discretion exercisable by a person who is not a trustee, payment includes payment in money's worth, rate applicable to trusts means the rate applicable under section 686(1A) of the Income and Corporation Taxes Act 1988, and trustees does not include personal representatives. _____________________________ Defined terms: the Income Tax Acts, ICTA s. 831(1)(b); personal representative, section 6.4.28(1); tax year, section 1.1.1. Origin: subs.(1) - ICTA s.687(1), (2), drafting; subs.(2)(a) - ICTA s.687(1)(a); subs.(2)(b) - ICTA s.687(1)(b); subs.(3) - ICTA s.687(2)(a); subs.(4) - ICTA s.687(2)(a); subs.(5) discretion - ICTA s.687(1), payments - ICTA s.687(5), rate applicable to trusts - drafting, trustees - ICTA s.687(4). _____________________________ Clause 6.4.25 1. This clause deals with the tax position of a person who receives income from a trust. It derives from parts of section 687. We envisage that the remainder of section 687, which deals with the position of trustees, will be dealt with in another Part of the Act. 2. Income of trustees of discretionary or accumulation trusts is charged to tax at the "rate applicable to trusts", which is currently 34%, rather than the lower or basic rate. When a payment is made out of such a trust, the amount paid is treated as being received after deduction of tax at this rate. 3. We have not rewritten the part of section 687(1) which disapplies sections 348 and 349(1). In the rewritten version of those sections we expect to include a provision to say they don't apply to income of this sort, with a signpost to this clause. Return to Plan of Part 6 6.4.26 Statements about deduction of tax A recipient of an annual payment within section 6.4.24 or 6.4.25(1) is entitled to a written statement from the payer, showing- the gross amount of the payment, the amount of income tax deducted, and the actual amount paid, if he asks for it in writing. In subsection (1)- where the income tax was deducted under section 349(1)(a) of the Income and Corporation Taxes Act 1988 (under which income tax may be deducted from some payments by the payer) payer includes a person through whom the payment was made, and payment includes a payment in money's worth to which section 6.4.25(1) applies. _____________________________ Defined terms: Origin: subs.(1) - ICTA s.352(1); subs.(2)(a) - ICTA s.349(1); subs.(2)(b) - ICTA s.687(5). _____________________________ Clause 6.4.26 1. This clause entitles someone who receives a payment after deduction of tax to ask the payer for a certificate of the tax deducted, which we have called a "statement". We have not reproduced section 352(2) here but we will deal with the obligation of the payer to provide the statement when the rules for deduction of tax are rewritten. 2. Subsection (2)(a) reflects the position under section 349 where the obligation to deduct tax falls on "the person by or through whom" the payment is made. Subsection (2)(b) reflects the position under section 687(5) which provides that discretionary payments by trustees "include payments in money or money's worth". Return to Plan of Part 6 Supplementary 6.4.27 Meaning of grossing up In this Chapter grossing up by reference to a rate of tax means calculating the amount (the gross amount) which after deduction of income tax at that rate would equal the amount to be grossed up (the net amount). The gross amount is the sum of the net amount and the tax deducted. The gross amount may also be expressed as- ( R ) GA = NA + ( NA x --- --- --- ) ( 100 - R ) where- GA is the gross amount, NA is the net amount, and R is the rate of tax by reference to which the net amount is to be grossed up. _____________________________ Defined terms: Origin: new, drafting. _____________________________ Clause 6.4.27 1. Current legislation includes several provisions which require an amount to be "grossed up" to arrive at the amount of income to be taxed. For example, in section 687(2) (payments under discretionary trusts) "the payment shall be treated as a net amount corresponding to a gross amount from which tax has been deducted ...". This clause explains what is meant by "grossing up" and provides a formula for calculating "the gross amount" to be taxed. 2. At present the clause is relevant only for 6.4.3 (distributions from unauthorised unit trusts) and 6.4.25 (grossing up of discretionary payments from trusts). Stages 3 and 4 of our work will involve a number of other provisions for which it will be relevant. 3. There is no equivalent provision in current legislation and it may be that, for many users, such a clause is merely a statement of the obvious. We welcome views on whether the clause serves a useful purpose. Return to Plan of Part 6 6.4.28 Minor definitions In this Chapter- marriage includes a marriage which has been dissolved or annulled; married couple's allowance means the amount specified in section 257A(1) of the Income and Corporation Taxes Act 1988; non-UK resident means a person who is not resident in the United Kingdom; personal representatives means- in the United Kingdom, persons responsible for administering the estate of the deceased, and in a country or territory outside the United Kingdom, those persons having functions under its law equivalent to those of administering the estate of the deceased. In this Chapter child of the family means a person under 21 who is a child of both the parties to a marriage or has been treated by them as a child of their family. But a person is not a child of the family if he has only been treated as one whilst being boarded out by a public authority or voluntary organisation. _____________________________ Defined terms: Origin: subs.(1) marriage - Finance Act 1988 ss.36(5)(i), 38(1)(b)(i), (6)(a), new; married couple's allowance - Finance Act 1988 s.38(5); non-UK resident - drafting; personal representatives - ICTA ss.347A(3), 687(4), 701(4), new; subs.(2) - Finance Act 1988 s.40(1)-. _____________________________ Clause 6.4.28 1. This clause provides some minor definitions for the provisions in this chapter. They may be put elsewhere in the final version of the Income Tax Act. 2. The definition of "marriage" is based on existing definitions but they don't apply to all references to marriage in current legislation. For consistency we have applied the definition to all references to "marriage" in Chapter 6.4. In practice we believe this minor change will affect few, if any, taxpayers. To the extent any recipients are affected the change will be favourable. 3. The clause includes a new definition of "personal representatives". Current legislation uses different definitions for different purposes. (See, for example, sections 229(1) and 701(4) and section 111(3) Finance Act 1989.) This new definition simplifies the vocabulary, does not include references to other (non-tax) legislation, and can be applied to different jurisdictions (within and outside the United Kingdom). It is a change in the statute, but not the underlying law. It won't affect anyone's tax liability. Return to Plan of Part 6 6.4.29 Index of defined expressions basic rate section 832(1) of the Income and Corporation Taxes Act 1988 the Board section 1.1.3 child of the family section 6.4.28(2) distribution section 209 of the Income and Corporation Taxes Act 1988 employment risk section 6.4.5(1) gross amount section 6.4.27 grossing up section 6.4.27 health risk section 6.4.5(2) the Income Tax Acts section 831(1) of the Income and Corporation Taxes Act 1988 the Inland Revenue section 1.1.3 insurance against a risk section 6.4.5(3) the insured sections 6.4.11, 6.4.12 maintenance payment section 6.8.8(3) marriage section 6.4.28(1) married couple's allowance section 6.4.28(1) net amount section 6.4.27 non-UK resident section 6.4.28(1) personal representative section 6.4.28(1) pre-15th March 1988 obligation section 6.8.8(4) purchased life annuity section 6.4.15 the Tax Acts section 831(2) of the Income and Corporation Taxes Act 1988 tax year section 1.1.1 trade section 3.1.4 unit holder section 832(1) of the Income and Corporation Taxes Act 1988 _____________________________ Defined terms: Origin: drafting. _____________________________ Clause 6.4.29 1. This clause shows where to find definitions used in this chapter. ?©Crown Copyright Keywords: Pension, Annuities, Annuity, Pensions, Annuities Tax, Taxation Please note that the annuities and income drawdown information contained within the articles and general text on Annuities Central may not be intended for annuity consumer use, may no longer be current and should not be used by consumers to make financial decisions. It is very important that you don't use this annuity information in isolation to decide which annuity or annuity alternative to buy. Annuity comparisons and pensions information or opinions expressed are made as at the date of this publication and are subject to change without notice. Always seek the help of an annuity broker before you buy an annuity.

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