CG36490 - Death of person with interest in possession: death of annuitant

TCGA92/S72 (3)

Where an annuity payable out of or charged on settled property is terminated by the death of the annuitant, Sections 72(1) and 73(1) apply in the same way as for an interest in possession. TCAG92/S75 which applied to most annuities up to 5 April 1996, was replaced by TCGA92/S72 (3) which is applied for the purposes of section 73 by TCGA92/S73 (3).

In such a case, (subject to the exception below) the corresponding part of the underlying assets, see CG36476, should be treated as the proportion of the whole which the amount of the annuity bears to the income of the trust. Income for this purpose should be taken to be the trust income of the twelve months immediately preceding the termination or the last trust accounts year ending before the termination.

If the annuity is very high or low by comparison with the settled property it should if possible be dealt with on the same basis as has been adopted under the statutory rules which apply for Inheritance Tax. The expression `corresponding part’ in Section 72(1) implies a connection between the amount of the annuity and the property required to fund it. This principle also applies where the person who has the main life interest dies, and there is an annuity payable out of the settled property.

For example under a will trust X has an annuity of £200 and Y has the life interest. The trustees grant Y an agricultural tenancy at £200 yearly rent, although a realistic rent is £4,000. It is considered that Section 72 should apply to 200/4000 only.

If some part of the trust is appropriated as a separate fund out of which the annuity is payable, then by virtue of TCGA92/S72 (4), only the assets of that fund are involved in the computations under TCGA92/S72 and TCGA92/S73.