As described in
IPTM5010, it will not always be the case
that periodical payments in a personal injury case are paid by the
defendant or the defendant’s insurer. A common arrangement is
that under the court order or settlement agreement the defendant or
defendant’s insurer purchases a life annuity or a series of
life annuities for the absolute benefit of the injured person.
IPTM1130 gives background on what
constitutes an annuity.
The annuities used may take various forms. They may provide
for payments to be made for the full duration of the life of the
injured person or they may be temporary annuities that only make
payments for at most a specified number of years. Another type of
annuity that might be used is a deferred annuity where payments
only start at some date in the future. Annuities may be tailored to
meet the particular needs of the injured person, for instance a
deferred annuity might be used where it is anticipated that the
injured person might require an increased level of care from some
date in the future.
The legislation specifically extends the tax exemption for periodical payments in a personal injury case to annuity payments made under an annuity purchased or provided
As with periodical payments generally, the link with the court
order or agreement is crucial. If, for instance, the court order
for damages provided for a lump sum to be paid to the injured
person who subsequently used it to purchase an annuity then the
annuity payments would
not be exempt from tax. First, the annuity was not
purchased in accordance with the order. Secondly, it was purchased
by the injured person, not the person by whom the payments would
otherwise fall to be made.
Where, however, a defendant or insurer initially directly
funds periodical payments of damages for personal injury specified
in the court order and then purchases an annuity for the injured
person to meet the payments, the payments under the new method of
funding will remain tax exempt. This will be the case even if an
annuity is not specifically provided for in the order, because the
Damages Act permits such a change without court approval.
The exemption from tax is personal to the injured person and does not continue past his or her death. Some annuities have a guaranteed period where payments continue to be made for a certain time after the injured person’s death, for instance if death occurs prematurely. If so, the payments made after the death are taxable in the normal way as payments from a purchased life annuity with an exempt capital element - see IPTM4300 onwards.
| Further reference and feedback | IPTM1013 |
