Under the will of a very wealthy relative, Ruth is entitled to an annuity of £4,000. She dies on 18 December 2002 leaving a substantial free estate.
The trustees of the will trust deliver an account on her death showing £100,000 as the taxable capital value under IHTA84/S50 (2) [i.e. the ‘annuity slice’ needed to produce £4,000 a year]. This is a yield of 4%.
You ask Shares and Assets Valuation (SAV) for the ‘annuity slice’ yield figures for that date and they quote a higher rate of 4.65% and a lower rate of 3.45%.
You are therefore able to decide that, as the yield is within the range under S50(3), the capital value is acceptable.
The annuity is £4,000 as above and the trustees account for capital of £65,000. This implies a yield of 6.15%, which is outside the S50 (3) range (as at 1. above). However, the minimum capital value will be approximately £86,020 (£4,000/4.65%).
In such a case you must explain the position fully to the trustees and seek an acceptable value that reflects a yield between the higher and lower rates. This is not an area for absolute precision although of course, if negotiations failed and it became necessary, HMRC could seek to determine a value in the normal way.
The annuity is £4,000 as above but the annuitant has a free estate of less than £10,000. The trustees account for £240,000 as the annuity slice. This implies a yield of 1.6% and is not acceptable, being outside the range at Example 1. The maximum capital value will be approximately £115,940 (£4,000/3.45%). You will need to explain the position and agree an acceptable value.
Examples 2 and 3 show how annuity slices could be ‘shaped’ to obtain an unwarranted advantage if they were not controlled by S50 (3). Example 3 offers a taxable value that is much too high. But this treatment would be unfairly helpful to the trustees because, in the right circumstances, it would establish a lower capital value for the remaining part of the fund - ‘the whole less a specified amount’ in S50 (2).