Section 720: Exempt proportion: term dependent solely on duration of life
2770.This section sets out the formula for calculating the exempt proportion of an annuity payment for the most common type of annuity, that is, an annuity whose term and the amount of the annuity payments, depend solely on the duration of a human life or lives.
2771.Under this type of annuity the amount of the annuity payment may change, but only in a pre-determined way. For example, the amount may increase by a fixed percentage at set intervals or, if written on two lives, may reduce on the first death. The method of calculation calculates the exempt part as a constant proportion of each annuity payment and thus caters for increases and decreases in the amount of the annuity payments.
2772.The source legislation does not set out how the actuarial value is to be calculated. However, the source legislation ensures a consistent approach is adopted by setting out when the value is to be calculated (see section 656(4)(c) of ICTA rewritten as subsection (3)) and requiring (see section 656(4)(c) and (7)(b) of ICTA rewritten as subsection (4)) that:
the same tables of mortality are always used (the tables prescribed by the regulations are those comprised in Table A8 set out in Appendix A on pages 113 to 115 of the booklet entitled “Continuous Mortality Investigation Reports Number 10” published by the Institute of Actuaries and the Faculty of Actuaries in 1990 (regulation 6 of the 1956 Regulations));
the age of the person during whose life the annuity is payable is taken as a whole number of years; and
no discount is given in arriving at the present value of a future payment.
2773.Subsection (4)(b) reflects Inland Revenue practice (which follows actuarial practice). See Change 120 in Annex 1.
