788 Capital element in certain purchased annuities

Summary

This section provides that, in the taxation of certain purchased life annuities, the part of each annual payment representing an estimated capital content is to be relieved from income tax and that only the balance is to be regarded as constituting income chargeable to income tax. The capital element of a payment is to be determined by the use of a specified formula.

Details

(1) “life annuity” includes not only an annuity payable to a person for his/her life, but also an annuity that may in certain contingencies end before or continue after his/her death. The term for which the annuity is payable must be ascertainable only “by reference to” the end of a human life. Broadly, therefore, the expression embraces annuities payable for life (including joint lives and survivorship annuities), guaranteed annuities payable for life or for a specified term (whichever is the longer) and annuities payable for life or until some specified event (for example, marriage or attainment of certain age), whichever is the shorter period.

“purchased life annuity” is a life annuity granted, in consideration of money or money’s worth, in the ordinary course of a business of granting annuities on human life.

(2) The section does not apply to —

• an annuity which, apart from the section, would be regarded as consisting partly of the repayment of a capital sum,
• an annuity purchased in connection with a “sponsored superannuation scheme” as defined in section 783,
• an annuity payable under substituted contracts within section 786,
• an annuity purchased, wholly or partly, by premiums or payments eligible for relief under section 787 (relief for retirement annuity contracts),
• an annuity purchased (for example, from an assurance company) in pursuance of a direction in a will, or purchased to provide for an annuity payable by virtue of a will or settlement out of income of property disposed by the will or settlement, whether or not there is power under the will or settlement to resort to capital, and
• an annuity purchased, wholly or partly, out of assets which, at the time of purchase of the annuity, were assets in an approved retirement fund within the meaning of section 784A or in an approved minimum retirement fund within the meaning of section 784C.

(3) Purchased life annuities, to which the section applies, are treated as containing a capital element which is not to be treated as an annual payment or in the nature of an annual payment. However, the capital element is to be taken into account in computing trading profit or losses where a lump sum payment would be taken into account (for example, in the computation of the trading profit or loss of a dealer in annuities).

(4) The capital element in each payment of an annuity is taken to be a fixed proportion of the payment equal to the proportion that the purchase price of the annuity bears to its actuarial value. In the straightforward type of case the capital element is arrived at by the following formula —

(5)(a) Where a payment is given both for the grant of a life annuity and for some other benefit, the consideration for the annuity is to be taken to be a part of the total arrived at by a just apportionment. However, a right to a return of part of the consideration for an annuity is not regarded as being for some other benefit. If, for example, a contract provided for an immediate annuity and the return, on the death of an annuitant within a specified period, of a sum not exceeding the balance of the consideration after deducting the annuity payments made, the entire consideration would be regarded as consideration for the grant of the annuity. If, on the other hand, the contract provided for an immediate annuity and the payment of a definite fixed sum on the death of the annuitant at any time, apportionment of the consideration would be necessary.

(5)(b) Where the amount of the consideration purporting to have been given for the grant of an annuity has affected, or has been affected by, the consideration given for some other matter, the considerations given for the annuity and the other matter must be aggregated and treated as one entire consideration given for both. The entire consideration is then apportioned as above. For example, the amount of the premium, or series of premiums, payable by a person under an annuity contract might affect, or be affected by, the rate of premium payable by him under a life assurance policy with the same assurance company.

(5)(c) The actuarial value of annuity payments is to be taken to be their value as at the date on which the first of the payments begins to accrue. If, for instance, an annuity is payable half-yearly in arrears, the date on which the calculation is to be made is 6 months before the first half-yearly payment. The actuarial value at that date is to be determined —

• in accordance with the prescribed tables of mortality (that is, prescribed by the Revenue Commissioners by Regulation under section 789), and
• without discounting any payment for the time which will elapse between the date on which the valuation is being made and the date on which the payment falls due. In other words, the rate of interest is 0% and the actuarial value for the purposes of the calculation is the total amount of the payments expected to be made.

(6) & (7) Where a person, making a payment in respect of an annuity, is notified in the prescribed manner (that is, in accordance with the provisions of the Income Tax (Purchased Life Annuities Regulations, 1959)) as to whether the annuity is a purchased life annuity to which the section applies and as to the amount, if any, of the capital element, that notice governs the rights and obligations of the person as to the deduction of tax from the payment. If no such notice is issued the person must regard the annuity as not being a purchased life annuity to which the section applies and must deduct tax from the full amount of the payment. (If it is subsequently established that the annuity contains a non-taxable capital element, the annuitant can claim an appropriate repayment of tax from Revenue).

(8) A person, other than a company within the charge to corporation tax, paying annuities, is to be reimbursed any tax which, but for the section, he/she could have deducted and retained (from the capital element) when making payments.

(9) The section applies to life annuities whenever purchased or commencing.

Relevant Date: Finance Act 2021