Annuities: how to calculate the capital value
To calculate the capital value of an annuity you should follow the principles set out in IHTA84/S50 (2) to (5). These provisions identify:
- the taxable amount of capital required to provide the annuity
- or the amount of the fund less the amount needed to provide the annuity.
In both cases S50 (2) provides the method of calculating ‘the annuity slice’ of capital to be charged to IHT.
S50 (3) ensures that the yield reflected in the S50 (2) calculation must fall within an acceptable range, so that the chargeable capital value cannot be manipulated for IHT purposes. There are examples of this at IHTM16213.
The rate for any particular day, quoted as the higher and lower rate, can be obtained from the Financial Times (This content has been withheld because of exemptions in the Freedom of Information Act 2000)
Before you raise any enquiries on an annuity you should be clear that a worthwhile amount of tax is at stake.
You can make a rough calculation of the value of the annuity itself for this purpose bearing in mind the implications on the rest of the fund i.e. (the whole less a specified amount) in S50 (2).
Annuities can sometimes give rise to complex problems and in any case of difficulty where there is tax at stake, you should refer for advice to your manager.