IHT – annuities, life policies and associated operations

For a life assurance company, the sale of an annuity to, and a life policy upon the life of, the same person must seem to be almost the least risky package that can be devised. If the person concerned enjoys a long and healthy life many annuity payments will have to be paid, but the financial impact will be ameliorated by the long deferment of the payment out under the life policy. Conversely, if the annuitant (and life assured) survives the making of the arrangement for only a short period of time, the financial impact of the early payout under the life policy will be mitigated by the cessation of the need to make payments under the annuity. The potential for IHT planning is obvious where the estate of the annuitant is reduced by the payment for the purchase of the annuity, which will clearly have been a commercial transaction, while the life policy is held for the benefit of the estate. Not surprisingly, there is an anti-avoidance provision in IHT Act 1984. Section 263 IHT Act 1984 provides that a transfer of value will be treated as made by the purchaser of the annuity unless it can be shown that the purchase of the annuity and the transfer of the policy are not associated operations. The Revenue has issued guidance on the application of s263 IHT Act 1984. Statement of Practice E4 states that the policy and the annuity will not be regarded as affected by associated operation if the ‘the policy was issued on full medical evidence as to the assured’s health’, and it would have been issued on the same terms if the annuity had not been bought. The ‘full medical evidence’ requirement has been considered by the court in Smith v HMRC [2007] EWHC 2304 (ch).