Inheritance Tax Act 1984 section 263

Annuity purchased in conjunction with life policy

Section 263 deals with the inheritance tax treatment of so-called "back-to-back" arrangements, where an annuity is purchased alongside a life insurance policy and the benefit of the policy is directed to someone other than the annuity purchaser.

• Where someone purchases an annuity on the life of an insured person and the benefit of a related life policy is vested in another person, the annuity purchaser is treated as having made a transfer of value for inheritance tax purposes, unless it can be shown that the two transactions were not associated operations.
• The value transferred is the lower of two amounts: (a) the total of the consideration paid for the annuity plus any premiums or other consideration given under the policy, or (b) the value of the greatest benefit the policy is capable of conferring, calculated as if that benefit arose at the date of the transfer.
• The rules apply to life insurance policies issued in respect of insurances made after 26th March 1974, or policies varied or substituted after that date.
• The same rules extend, with necessary modifications, to contracts for annuities payable on a person's death that are made, varied, substituted, or replaced after 26th March 1974.