Fundamental concepts: what is an annuity?
There is no single definition in the taxes acts. There is an ancient definition inStrouds Judicial Dictionary, quoting Coke on Littleton:
An annuity is a yearly payment of a certaine summe of money granted to another in fee, for life, or yeares, charging the person of the grantor onely.
From an early case called Foley v Fletcher (1858), 28 LJ Ex100, the judgment of Watson B at 784-5 is often quoted:
But an annuity means where an income is purchased with a sum of money, and the capital has gone and has ceased to exist, the principal having been converted into an annuity.
From this and other cases, notably Southern-Smith v Clancy, 24TC1,the following factors emerge as needing to be present
- the payments must be made under a legal obligation
- those payments must be pure income profit
- they must be capable of being characterised as annual, so being capable of recurrence on a periodic basis by reference to an annual time frame
- the purchase sum must pass absolutely to the provider
- no debtor/creditor relationship is created in relation to that sum; it is replaced by the annuity
- the annuitants only right is to demand payments when due
- the payments must not be instalments of pre-existing debt.
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