IPTM4310 - Purchased life annuities: partial exemption scheme: effect of life and other contingencies on term of annuity and on amount of annuity payments

The term of every purchased life annuity is dependent on the duration of human life by definition, see IPTM4220. The amount of the annuity payments may also be so dependent. And either term or amount may or may not be dependent on some other contingency.

By ‘contingency’ is meant something related to a possible future and uncertain event.

If the amount of the annuity payments depends solely on the duration of human life, a constant proportion of each annuity payment is exempt, called the exempt proportion.

If the amount of the annuity payments does not depend solely on the duration of human life, because it is subject to some other contingency, a constant sum is exempt, called the exempt sum.

It is possible in some circumstances, see IPTM4330, for the exempt sum to exceed a particular annuity payment. In that case, the excess exempt amount is carried forward.

The method of calculating the exempt proportion or exempt sum depends on whether, as will usually be the case, the term of the annuity is solely dependent on the duration of human life, and not on some other contingency.

If the annuity term is solely dependent on the duration of human life, the formulae in IPTM4320 (exempt proportion), or IPTM4330 (exempt sum) apply.

If, exceptionally, the annuity term is dependent on some other contingency in addition to that of human life, the exempt proportion or exempt sum is calculated on a just and reasonable basis, having regard to both the additional contingencies and the relevant formula.

If both the amount of the annuity payment and the annuity term are dependent on non-life contingencies, the exempt sum method is applied by ITTOIA to the income tax code.