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HMRC internal manual

Insurance Policyholder Taxation Manual

HM Revenue & Customs
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Immediate Needs Annuities: tax treatment up to 30 September 2004

The then Inland Revenue discussed the treatment of Immediate Needs Annuities with theinsurance industry in 1996.

It was concluded that, when a long-term care insurance policy was taken out, it was commonfor there to be a contract under which the insurance company made payments directly to acare provider to provide care for the insured person.

Where this was the case, there were no circumstances in which the insured person couldreceive any payments themselves.

The insured person was not liable to tax on payments made direct to a care providerbecause the contract that they had with the insurer was not an annuity contract but acontract for the provision of services.

Where payments were made to the insured person by the insurer, even where they weremandated or just passed on to a care provider, they were treated as ordinary PurchasedLife Annuities - see IPTM4220 - and the insured person wasliable to pay tax on them.

The need for legislation

Challenges in the courts in 2000 meant that Government was required to pay part of thecost of care regardless of a person’s income. The effect was that the amount of manyImmediate Needs Annuities exceeded the cost of the care they were taken out to meet andsome insurers wanted to pay the surplus directly to the insured person. This prompted areview of the treatment of payments under such contracts.

It was concluded that the original view was unsound and that all payments, whetherdirectly to a care provider or to the insured person, should be treated as part of theinsured person’s taxable income.

In order to restore the position to the earlier view and to end uncertainty, legislationwas introduced by FA04/S147. This enacted the exemption as ICTA88/S580C,which was later re-written as ITTOIA05/S725.

Further reference and feedback IPTM1013