Life Policies: life policy linked with an annuity: the Associated Operations test
The definition of associated operations (IHTM14821) is contained in IHTA84/S268 and includes
‘any two operations of which one is effected with reference to the other, or with a view to enabling the other to be effected or facilitating its being effected’.
Statement of Practice E4 (SP E4) sets out HMRC practice for these back-to-back arrangements, it reads:
Life assurance policies and annuities are regarded as not being affected by the associated operations rule if, first, the policy was issued on full medical evidence of the assured’s health and, second, it would have been issued on the same terms if the annuity had not been bought.
The meaning of the phrase ‘full medical evidence’ in SP E4 was the subject of correspondence between the Capital Taxes Office and the Association of British Insurers (ABI). The details of the agreement reached are contained in the circular LIC 260/87 issued by the ABI to its constituent member life offices on 22 December 1987. The critical words are:
‘The Inland Revenue…..will regard the policy as issued on full medical evidence of the life assured’s health if it can be shown that the company has, as a minimum, obtained a private medical attendant’s report and has used it as the basis of its normal underwriting procedures in the same way as it would have done had the annuity not also been purchased. If these procedures require a medical examination in the particular circumstances, the Inland Revenue will expect such an examination to be carried out. Companies will need to retain the records of cases so that the taxpayer will have evidence on which the Inland Revenue can judge whether the procedures have been followed in any particular case and can form a view on whether the requirements of the Statement of Practice (as interpreted by this circular) have been met.’
HMRC’s interpretation of ‘full medical evidence’ was upheld in the case of Smith & others v HM Revenue & Customs  EWHC 2304 (Ch).
It is the responsibility of the Actuarial Team to decide whether these two conditions are satisfied, and reference should be made under IHTM20372.