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HMRC internal manual

Insurance Policyholder Taxation Manual

Purchased life annuities: partial exemption scheme: exempt proportion formula

This formula applies where both the term and the amount of the annuity payments are solely dependent on the duration of human life and not on any other contingency. This is the most common kind of life annuity. The amount of payment may change, but only in a specified fashion. This might be under a stepped annuity, where the payments increase by a pre-determined fraction at intervals, or, if written on two lives, might reduce on the first death.

In this case,

Exempt proportion = AP x PP/AV

where (

AP = the annuity payment

PP = purchase price of the annuity

AV = actuarial value of the annuity payments.

The actuarial value of the annuity payments is their value at the date when the first of the payments starts to accrue. It is determined

  • by reference to prescribed tables of mortality, see SI2008/562, as amended by SI2008/1481
  • taking the age of the life in question in whole years at that date
  • with no discount for the time value of money.If for any reason it is not possible to determine that actuarial value by reference to the prescribed tables, the value is to be determined and certified by the Government Actuary.

See IPTM4350 and IPTM4360 on how these calculations are performed in practice.

Further reference and feedback IPTM1013