Guaranteed Annuities
1. In most cases, when a person dies, the right to receive payments under a pension or retirement annuity or under a purchased life annuity, ceases on the death. In some cases, however, the annuity may be guaranteed for a fixed period and the person dies before the end of that fixed period. The payments may then continue to be paid to the estate until the fixed period comes to an end. The value of that right to receive the remainder of the payments should be included as an asset of the estate. 2. This form will provide an estimate of the open market value of the guaranteed annuity payments which are to be paid to the estate in straightforward circumstances, as set out below. The values calculated are for guidance and you are free to submit your own alternative valuation. However, we consider that the values produced by this form represent reasonable estimates of the open market values under s.160 IHTA 1984. 3. You may use this form if • the amount paid each year is constant, or • the amount increases each year by a fixed percentage, and • there is no option to have a lump sum paid instead of the future instalments (often called a commuted value). 4. You should not use this form if • the amount paid each year varies, but the increase or decrease is not a fixed percentage each year, (for example, it is an index-linked, or a ‘with-profits’ annuity), or • if you consider that higher rate tax, rather than basic rate tax should be accounted for in the calculation. 5. If there is an option to receive a lump sum instead of the future instalments, then the value of this lump sum should be included in form IHT 200; in box 2 on page D6 if it is a pension or retirement annuity, or in box 4 on page D9 if it is a purchased life annuity. 6. To use this form, you should fill in the boxes on the next page. There are notes about each box. When you have filled in all the boxes, click on the calculate button and go to page 3 to see the calculation.
Annuity Calculator Enter the dates and figures in the boxes below. When you have entered all the figures click on the calculate button. The notes below explain what should go into each box. Name Date of death (dd/mm/yyyy)
Date of next payment due after death Date of last guaranteed payment Number of payments made per year Is this a pension/retirement annuity? (Y/N) Is this a purchased life annuity? Gross annual amount of annuity Annual amount subject to Income Tax Annual rate of increase Notes
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1. Enter the date that the next payment is actually due following the date of death. In many cases there may be a short delay in payments being made while the insurance company registers the change of ownership, however that does not affect the date the next payment becomes due. Example Payments are due monthly on the 28th of the month. Mr A dies on the 1st of June 2002. The insurance company is informed of the death and do not make a payment on 28th June 2002. After registering the change of ownership the insurance company re-starts payments on 28th July 2002, including the backdated payment from 28th June 2002. The date of the next payment immediately after the date of death is 28th June 2002 and this date should be entered on the form. 2. Enter the date that the final payment will be made. 3. Enter the number of payments made per year. If the annuity is paid monthly, then there are 12 payments a year; if the annuity is paid quarterly then there are 4 payments a year, etc. 4. Enter Y or N as appropriate. A pension or retirement annuity is all treated as income for income tax purposes. If the policy documents, or any letters from the insurance company refer to a capital element, then you are dealing with a purchased life annuity, not a pension or retirement annuity. 5. This will be set automatically depending on your answer in box 4. 6. Enter the gross annual amount being paid as at the date of death. So, if the person who has died was entitled to gross payments of £1,000 every month, the gross annual amount is 12 x 1,000 or 12,000. 7. Enter the amount of the annuity subject to income tax. If the annuity is a pension or retirement annuity then the whole gross annual amount will be subject to income tax. You should enter the value in box 6 in this box. If the annuity is a purchased life annuity, the insurance company should have provided you with two figures, one is a value which is treated as capital for income tax purposes and the other is a value which is treated as income. This will often be on the policy document itself. Put the annual amount treated as income for income tax purposes in this box. 8. Enter the rate at which the annuity increases each year. If the increase is 5% per year, enter 5. If the annuity is level, enter 0.
Annuity Calculator Name Date of death
Purchaser’s yield net of basic rate Tax Annual rate of increase in annuity Net effective rate Date of next payment due after death Date of last guaranteed payment Number of payments made per year Total number of payments left Annuity factor Calculation Gross annual sum paid Annual amount subject to income tax Income tax at basic rate Net annual annuity Multiplied by annuity factor Discount for non-assignability Less purchaser’s costs Estimated Open Market Value 9
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9. The ‘Estimated Open Market Value’ is the price that we consider might be paid for the right to receive the remaining annuity payments. This is the value that is required under s.160 IHTA 1984. This figure should be entered on • form D6 at question 1 if the annuity is a pension or retirement annuity, or • form D9 at question 3 if it is a purchased life annuity. You should also attach a copy of this calculation to form IHT 200.