This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Insurance Policyholder Taxation Manual

Fundamental concepts: what is an annuity?

There is no single definition in the taxes acts. There is an ancient definition inStroud’s 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 annuitant’s only right is to demand payments when due
  • the payments must not be instalments of pre-existing debt.
Further reference and feedback IPTM1013