Will / Annuity - Free of all taxes

I have a problem rising out of a Will drafted by someone who described himself as an accountant and tax consultant but was certainly not legally qualified. He drew up his own Will and as part of the provisions he left an annuity to a lady who had been his partner. The balance of the estate goes, in effect, to his family. The key element that is causing a problem is that the Will trustees are to pay the annuity out of funds for a property portfolio held and specifically the Will says that the annuity should be paid by “bankers standing order free of all taxes and deductions whatsoever”.
My instinct is that the Will was probably based on a precedent he had seen somewhere and did not reflect the fact that annuities of this sort are not subject to deduction of tax but are, instead, treated as the taxable income of the recipient.
The question is how to interpret that provision and, in particular, whether that requires the payment of the annuity to be grossed-up at the basic rate of tax which is what the partner’s advisers are arguing for, whether some more complicated procedure is required under which the partner is required to demonstrate the levels of tax she pays and have those reimbursed by the trustees or whether, because no deduction was required in the first place, the annuity is simply paid in the amount set out in the Will and tax issues are the problem of the recipient.
I can see arguments both ways; whatever the trustees are doing in paying gross, they are certainly not in a position to make a deduction from the annuity because it requires to be paid gross. On the other hand, a Court might reasonably say that he must have intended something to happen and if he got the drafting wrong his intention would still be clear that she was to have the amount defined as the annuity net and free in her hands although that is not what the Will says.
Any thoughts gratefully received.

The annuity is payable under deduction of tax and is subject to tax in the hands of the annuitant: s683 ITTOIA 2005 and ss 899 and 901 ITA 2007. The exemption in s901(2) only applies to PRs where the annuity was created by the deceased during lifetime. Such annuities are no longer required to have tax deducted by a living individual.

The obligation is to deduct tax at basic rate. The recipient is then liable at other rates or can claim a refund.

“Free of all taxes” if not otherwise defined almost certainly means that although the deduction must be made by the payer the payee is entitled to the sum specified as if it were not i.e. to be paid the grossed-up amount.

It probably also means free of IHT but if it is only and not primarily payable out of a particular fund it is the fund as reduced by IHT which it bears and limited to the available income (so the grossed up amount cannot exceed that).

These are matters of interpretation of the particular document so there must be some hesitation.

Jack Harper

I seem to recall from my early days that there were a number of cases about annuities including about their payment (depending on whether the annuity was payable before or after tax) and their funding. Where an annuitant is entitled to a tax refund, part, or all, of it may be due back to the estate - Pettit, Re, Le Fevre v Pettit

Graeme Lindop
Probate Consultant
Coles Miller Solicitors LLP

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As Graeme mentions there is no shortage of reported cases on annuities and annual payments; whether income tax should be deducted at source; and whether or not payments are or are not “free of tax”.

It seems reasonably clear from the wording in the will that any payments are to be made “free of income tax” as there is a statement specifically made in this regard which refers to “all taxes” (which as Jack mentions presumably also includes IHT). [Reckitt v Reckitt CA 1932; but see, for example, Abadam v Abadam 1864].

The combination of ITTOIA s683 and ITA 2007 ss898, 901 seems to me to confirm the need to deduct income tax at source from the payments.

Conclusion thus seems to be a need to “gross up” any payments made.

There have been many changes to tax treatment of annuities, annual payments etc over the years ands I must confess to finding it difficult to trace the relevant tax provisions which unfortunately appears in ITA 2007 and ITTOIA 2005.

Malcolm Finney

I have seen another Will recently which also tried to establish an annuity free of taxes for a non-exempt beneficiary with the balance passing to a spouse. It was a mess and leaves the executors/ trustees in a problematic position.

If you are instructed on behalf of the executors then this would almost certainly be a case to pass to Counsel, to protect them from any claims of maladministration. If the wording is as unclear as it seems then consider an application to Court for directions prior to any distributions being made.