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Estate with a purchased life annuity

Does an estate get the deemed tax deduction if it encashes a purchased life annuity?

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I have an estate with two purchased life annuities (5% tax free capital withdrawal, chargeable event on any excess) both of which are showing significant gains over the original capital. Will the estate get the 20% deemed tax deduction if the policies are encashed during the administration period or are the executors better off transfering them to the beneficiaries and they then encash and claim topslicing relief?

I recall some time ago I tried to report a similar type of gain on an Estate administration tax return and the software would not allow the 20%, but I can't remember if this was a software glitch or the actual position. Also, as I was very junior at the time, my supervisor finished the return off and I can't remember them giving me any feedback on this point.

In addition, the policies were initially taken out in the name of the deceased and their daughter (the Executor of the estate). So I am wondering if half the gain should be reported on the daughter personally anyway? Any guidance you can provide would be appreciated.

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By richard thomas
09th Mar 2020 15:58

In answer to your first question, personal representatives are not entitled to credit for tax treated as paid (see s 530(1) ITTOIA which limits the credit to individuals and trustees). There is a good reason for this because personal reps are not liable to tax on any chargeable event gain unless the policy is one of the unusual ones listed in s 531(3) ITTOIA. For this proposition see s 466 ITTOIA. Thus the only gains on which they are taxable are ones where no CT was chargeable on the underlying income or pre-1993 annuities, and the charge then is on the basic rate only with no credit.

However chargeable event gains made by personal reps are included in the administration income (s 664(2)(e) ITTOIA) and where relevant the beneficiaries may be liable to higher etc rates on any gains included in specific bequests or their share of residue. Such beneficiaries would be entitled to a credit for deemed tax and to top slicing relief if appropriate.

It doesn’t then seem to matter whether the gains accrue to the personal reps or the beneficiaries (I assume the latter would come about if the contracts are distributed to the beneficiaries as legacies)

But I am a little confused about exactly what has been going on here. You say the contracts were taken out “in the name of” the deceased and their daughter the executor. What do you mean by this? Who paid the premiums? That person would generally be the beneficial owner of the contract. If not the deceased (or not only the deceased) how did the whole of the contracts end up in the deceased’s estate?

And who is the person on whose life the annuity is written? Clearly not the deceased’s alone or the contracts would have ended on their demise. Was it a last survivor joint contract? And on what basis would you say that the daughter was personally liable if her interest in the contracts is merely as executor.

There seems to be a lot more by way of facts to disclose, so my answer above is based on the assumption that it is the personal reps who hold the whole of the contracts in the estate.

Thanks (1)
Replying to richard thomas:
By DTB27
11th Mar 2020 11:51

Richard Thomas, thanks for the reply. Sorry some of my wording may have been a bit confused.

The policies (Personal Investment Plans) were taken out by the deceased on a last survivor basis with the deceased and her daughter as the lives assured. The policy providers are stating that any chargeable event gain is treated as income of the estate.

The daughter is also the executor of the estate.

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Replying to DTB27:
By richard thomas
11th Mar 2020 12:06

You are now referring to the contracts as "policies" and as Personal Investment Plans, both of which terms I have only ever seen used in relation to life assurance policies and not purchased life annuity contracts. I am though aware that some PLAs provide for investment growth but not that they are Personal Investment Plans.

You will of course have seen the policies which I have not and know that they are in fact PLAs, in which case my statement of the law is relevant.

Presumably the annuity was payable to the deceased, and as its period of validity was to the death of the last survivor, it continues and is payable to the estate and will form part of the estate income and be potentially taxable on the beneficiaries when distributed.

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