Income Tax (Trading and Other Income) Act 2005 section 502

Exception from section 501 for loans to buy life annuities

Section 502 provides an exception from the rules on loans treated as part surrenders under section 501, where the loan is used to buy a life annuity and the interest qualifies for tax relief.

• Where all the interest on a loan made under a life annuity contract qualifies for tax relief, section 501 (which treats loans as part surrenders giving rise to a chargeable gain) does not apply at all.
• Where only part of the interest qualifies for tax relief, section 501 applies only to the portion of the loan on which the interest does not qualify for relief.
• Interest qualifies for tax relief for these purposes if it meets the conditions for relief under the general interest relief provisions in section 353 of ICTA, specifically as a result of section 365 of ICTA relating to loans taken out to purchase life annuities.
• The practical effect is that borrowers who take out loans secured on life annuity contracts are not penalised under the chargeable events rules to the extent that the loan interest already receives tax relief.