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HMRC internal manual

Insurance Policyholder Taxation Manual

Purchased life annuities: different types of annuity: annuities certain

Annuities certain provide a series of payments, usually in return for a single lump sum, that is payable for a fixed term. In particular, the term is not subject to alteration by the death of any person. In other words, there is no life contingency. If such an annuity is purchased from an insurance company or friendly society, part of each annuity payment is treated as a return of capital. This result, unlike the situation in relation to a life annuity, follows from first principles as determined by the Court - see Perrin v Dickson (1929), 14TC608. The reasoning is that, as the term is known from the start, it is straightforward and correct to determine the amount of exempt capital comprised within each payment. Only the interest, or income, element is treated as income for tax purposes. And it is taxed as interest rather than as an annual payment.

Annuities certain are not annuities in the true sense at all. The tax treatment of the payments is thus similar to that of purchased life annuities, but they are not within the scheme described at IPTM4300 as the dissection arises on first principles. If written by an insurance company they are in fact a variety of capital redemption policy, see IPTM1120, and consequently are potentially within the chargeable events regime, see IPTM3300, though they are not likely to give rise to chargeable events, see IPTM3400.

A UK-resident insurance company will deduct tax at the basic rate from the payments it makes, but from the interest parts only. In total, the interest parts will be equal to the amount by which the sum of the annuity payments exceeds the purchase price of the annuity.

If HMRC offices have any cases of difficulty, they should refer them to CT&VAT (Technical) Insurance Group (see ‘Technical Help’ link on left hand bar).

Further reference and feedback IPTM1013