What does section 722 of ITTOIA 2005 do?

Section 722 determines how consideration paid for a purchased life annuity is identified when it forms part of a composite transaction. Where the purchase price was not paid solely for the annuity or has been artificially influenced by another element, the total consideration must be apportioned on a just and reasonable basis for exempt element calculations.

How does section 722 treat capital-protected annuities?

Section 722 provides that any consideration given for the right to a return of premiums or other annuity consideration is treated as having been given solely for the annuity. This means the full purchase price of a capital-protected annuity is used in the exempt proportion or exempt sum calculation with no reduction for the capital protection feature.

When is apportionment required under section 722?

Apportionment is required in two situations: first, where the consideration was not paid exclusively for the annuity, such as when a lump sum buys both an annuity and another product; and second, where the nominal price attributed to the annuity has been artificially influenced by the price paid for another element of the transaction.

What standard of apportionment does section 722 require?

Section 722 requires the total consideration to be apportioned on a just and reasonable basis. There is no prescribed formula; the apportionment must simply produce a fair result in the circumstances. This ensures the correct capital element is identified for the exempt proportion or exempt sum calculations under sections 720 and 721.

Income Tax (Trading and Other Income) Act 2005 section 722

Consideration for the grant of annuities

Section 722 deals with how to determine the amount paid for a purchased life annuity when it forms part of a wider or composite transaction.

Where the purchase price is not paid solely for the annuity, or where the price paid for the annuity has been influenced by (or has itself influenced) the price paid for something else, the consideration must be apportioned on a just and reasonable basis
Capital-protected annuities — which provide for a return on death of the purchase price less annuity payments already made — could be seen as a combination of an annuity and a life insurance policy, but the legislation treats the full consideration as having been paid for the annuity alone
More broadly, any consideration given for a right to a return of premiums or other annuity consideration is treated as consideration given solely for the annuity
The apportionment rules ensure that the correct capital element is identified for the exempt proportion or exempt sum calculations under sections 720 and 721

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