IPTM4300 - Purchased life annuities: charge to tax and partial exemption scheme: general

For recipients liable to income tax, the legislation on purchased life annuities is in Chapter 7 of Part 4 (charge to tax) and Chapter 7 of Part 6 (partial exemption scheme) of ITTOIA05. The legislation prescribes the amount of each annuity payment that is treated as exempt from the charge to income tax, following a claim for that purpose.

Tax is charged on the amount of annuity payments arising in the tax year, subject to the special rules on foreign income, see IM1560 onwards. It is charged on the person receiving or entitled to the payments, who is given credit for any tax deducted by the payer.

No tax is, however, charged under the scheme on the exempt capital amount computed as described in IPTM4320 and IPTM4330. The exemption does not apply to a trader for whom the annuity is a receipt of the trade. The charge on trading income takes precedence and does not feature the exemption.

For recipients liable to corporation tax, the equivalent legislation is in Chapter 5 of Part 14 of ICTA88. However, from the start of the first accounting period of a company to begin on or after 1 April 2008, it is no longer taxed on a purchased life annuity in a similar way as an individual and that Chapter is repealed. Instead, the company is taxed under the loan relationship rules in Chapter 2 of Part 4 of FA96. The income element of the annuity payments will be recognised under the accountancy treatment of the annuity and so will be taxable as a non-trading loan relationships credit. See Corporate Finance Manual generally and IPTM3900 onwards.