Annuity Legacy in a Will UK: Leaving an Annuity Under s.28 AEA 1925

Updated 31 May 2026 · 9 min read · Wills & Estate Planning

A will can leave a beneficiary a regular income for life rather than a lump sum — known as an annuity legacy. Rather than handing over a capital sum that the beneficiary must then manage, the testator directs the estate to pay a fixed annual (or monthly) amount for the rest of the beneficiary’s life. Understanding how annuities work under the Administration of Estates Act 1925, how they are valued for IHT, and how they are taxed in the recipient’s hands is essential for anyone considering this type of legacy.

What Is an Annuity Legacy?

An annuity legacy is a testamentary direction to pay a named beneficiary (the annuitant) a periodic income — almost always for their lifetime. Unlike a pecuniary legacy (a one-off cash payment), an annuity creates a continuing obligation on the estate or its trustees. Annuity legacies were more common in Victorian and Edwardian wills, when wealthy testators wished to provide for dependants or staff without handing them a capital sum they might squander. They remain valid today and can still serve a useful purpose — for example, providing a fixed income for an elderly relative who would struggle to manage a capital sum.

The two mechanisms for satisfying an annuity obligation are: (1) purchase of a commercial annuity policy under section 28 AEA 1925, which discharges the estate in a single transaction; or (2) ongoing direct payments from an estate trust fund, which requires the trust to remain open and invested for the duration of the annuitant’s life.

The s.28 AEA 1925 Power to Purchase

Section 28 of the Administration of Estates Act 1925 gives executors statutory authority to purchase a life annuity from an insurer to discharge a testamentary annuity obligation. The executor pays a single capital premium to the insurer; the insurer then undertakes to pay the annuity to the beneficiary for life. Once the purchase is complete:

The estate is discharged — no further liability to the annuitant
The annuitant looks to the insurer for payment
The estate can be fully administered and closed

The purchase price is treated as a pecuniary legacy for estate administration purposes — it ranks alongside other debts and legacies in the order of priority set out in Part II of Schedule 1 AEA 1925. Where the estate is insufficient to pay all pecuniary legacies in full, annuity purchase costs abate proportionally with other pecuniary legacies unless the will directs otherwise.

If the will is silent on how the annuity is to be funded, the executor should consider whether s.28 can be used without explicit authority and, if in doubt, obtain the annuitant’s consent or apply to the court for directions before purchasing a commercial policy.

Valuing an Annuity Legacy for Inheritance Tax

IHT is charged on the value of the estate at death. Where the will directs the purchase of a commercial annuity, the relevant figure for IHT purposes is the cost of purchasing the annuity at the date of death — i.e., the open-market premium an insurer would charge for an equivalent policy on the annuitant’s life. This capital amount is deducted from the residuary estate in the IHT calculation.

Where the estate instead continues to pay the annuity directly (no commercial purchase), the capitalised value of the income stream must be calculated actuarially — the present value of the expected future payments given the annuitant’s age and life expectancy. HMRC’s actuarial tables (used for annuity valuations) inform this calculation, and executors may need to instruct an actuary or use HMRC’s prescribed factors.

Index-linked annuities are more expensive to capitalise than fixed annuities because the future payments are expected to grow. The testator’s IHT205 or IHT400 must accurately reflect the annuity’s capitalised cost; undervaluing it is a serious compliance risk.

Income Tax: How Is the Annuity Taxed?

The income tax treatment of an annuity legacy depends on its structure.

Commercially purchased annuity (s.28 AEA 1925 route): Where the executor purchases a life annuity from an insurer with estate funds, the annuity becomes a purchased life annuity under Chapter 7 Part 4 ITTOIA 2005. HMRC splits each payment into:

A capital element (exempt from income tax) — calculated by reference to the purchase price and the annuitant’s life expectancy at the date of purchase
An income element (taxable as savings income) — the balance

The insurer provides a breakdown with each payment. The annuitant reports the income element on their self-assessment return. Payments are made gross (no deduction at source for purchased life annuities).

Direct payments from the estate: Where the estate or a trust makes periodic payments directly, the payments are generally treated as income in the annuitant’s hands under section 687 ITTOIA 2005 — fully taxable as miscellaneous income, with no exempt capital element. Basic rate income tax (currently 20%) is deducted at source by the trustees and the annuitant can reclaim or pay additional tax via self-assessment.

This distinction means the commercially purchased route is usually more tax-efficient for the annuitant, as a portion of each payment is tax-free.

Annuity Legacy vs Pecuniary Legacy: Key Differences

The choice between an annuity and a pecuniary legacy involves several practical and tax considerations:

Administration: A pecuniary legacy closes with a single payment; an annuity requires either a commercial purchase (one transaction but valuation complexity) or an ongoing trust structure
Certainty: A pecuniary legacy is certain in amount; an annuity’s total cost depends on how long the annuitant lives
Income tax: A pecuniary legacy is capital in the beneficiary’s hands — no income tax; a direct estate annuity payment is fully taxable income; a purchased life annuity is partly exempt
Benefit to beneficiary: A beneficiary who cannot manage capital safely may be better served by an annuity than a lump sum they might deplete
Drafting: Pecuniary legacies require minimal drafting; annuity legacies need careful provisions covering abatement, funding, index-linking, and cessation events

Practical Drafting Considerations

A well-drafted annuity legacy should address:

The annual amount and payment frequency (monthly or quarterly is more practical than annual)
Whether the annuity is index-linked (and to which index)
The chosen discharge mechanism: commercial purchase under s.28 AEA 1925, or direct payments
What happens if the estate is insufficient to purchase or fund the annuity (abatement provisions)
Whether the annuity is inalienable (the beneficiary cannot assign or charge it)
Cessation events — e.g., remarriage, moving abroad

Given the income tax and IHT complexity, a solicitor should draft annuity provisions. DIY annuity legacies frequently create ambiguity about source of funding, abatement priority, and tax treatment — problems that can result in litigation between the annuitant and residuary beneficiaries.

FAQs

What is an annuity legacy in a will?

An annuity legacy is a testamentary gift of a regular income — typically a fixed annual sum — payable to a named beneficiary for a specified period (most commonly for life). Instead of receiving a lump sum from the estate, the annuitant receives periodic payments (monthly, quarterly, or annually). An annuity can be created in two ways under English law: (1) the executors purchase a commercial annuity policy from an insurance company using estate funds, under the power in section 28 of the Administration of Estates Act 1925 (AEA 1925), which satisfies the obligation by a one-off capital payment; or (2) the estate continues to make direct periodic payments from its own resources, which requires sufficient liquid assets or ongoing investment income. Annuity legacies are relatively uncommon in modern wills compared to pecuniary legacies and residuary gifts, but they remain valid and useful where the testator wants to guarantee a beneficiary a regular income without giving them control over a capital sum.

What is the executor's power under s.28 Administration of Estates Act 1925?

Section 28 of the Administration of Estates Act 1925 gives executors the power to purchase a life annuity from an insurance company to satisfy a testamentary annuity obligation. The executor pays the purchase price (a single capital sum) to the insurer, and the insurer then assumes the obligation to pay the annuity to the beneficiary for the rest of their life. This discharges the estate from any continuing liability — once the annuity is purchased, the executor has no further obligation to the annuitant, and the annuitant looks to the insurer (not the estate) for payment. The power under s.28 is important because it allows the estate to be fully administered and closed rather than remaining open indefinitely to service ongoing annuity payments. Section 28 applies where the will gives the executors a direction or power to purchase an annuity; if the will is silent, executors should obtain beneficiary consent before using estate assets to buy a commercial policy, or apply to court for directions. The cost of purchasing the annuity — the capital sum — is treated as a pecuniary legacy for the purposes of estate administration: it is paid from the general estate in the same order of priority as other debts and legacies.

How is an annuity legacy valued for inheritance tax purposes?

For inheritance tax purposes, an annuity left in a will is not included in the testator's estate in the normal sense — IHT is charged on the total value of the estate that passes on death. If the will directs the executor to purchase an annuity for a beneficiary, the relevant IHT value is the cost of purchasing that annuity (i.e., the capital sum to be paid to the insurer under s.28 AEA 1925). This capital sum comes out of the taxable estate in the same way as any other pecuniary legacy; it reduces the residue passing to residuary beneficiaries and, if the estate is chargeable to IHT, the purchase cost is an item of estate expenditure borne before IHT is calculated on the residue. The open-market cost of purchasing an equivalent annuity from a commercial provider at the date of death is the figure HMRC uses. Where the annuity is simply an ongoing estate obligation (payments made directly from the estate), the capitalised value of the income stream must be calculated using actuarial tables (based on the annuitant's age and life expectancy) for IHT reporting on the IHT400 or IHT205/IHT217.

How is an annuity from a will taxed in the hands of the recipient?

The income tax treatment of a testamentary annuity depends on how it is structured. Where the executor purchases a commercial annuity under s.28 AEA 1925: the annuity payments received by the annuitant are partly capital (return of purchase price) and partly income. HMRC treats such annuities as 'purchased life annuities' under Chapter 7 Part 4 ITTOIA 2005. Only the income element is taxable as savings income; the capital element (the exempt portion, calculated by reference to the insurer's tables using the annuitant's life expectancy) is tax-free. The insurer deducts the capital element and pays the income element gross (annuities purchased with non-pension funds are paid without tax deduction — the annuitant self-assesses). Where the estate makes direct annuity payments from estate income (interest, dividends, rent): the payments are treated as income of the annuitant, not as capital, and are taxed in full as miscellaneous income under s.687 ITTOIA 2005. Where an annuity is charged on residue and the estate meets the payments from capital: a special rule can apply whereby the payments are treated as income in the annuitant's hands regardless of the estate's source.

How does an annuity legacy differ from a pecuniary legacy?

A pecuniary legacy is a gift of a fixed sum of money paid once (or in a small number of instalments) from the estate. An annuity legacy is a gift of a periodic income stream payable over time (typically for the beneficiary's life). The key practical differences are: (1) Administration: a pecuniary legacy closes the estate's obligation with a single payment; an annuity (unless discharged by purchasing a commercial policy) keeps the estate open indefinitely or requires a continuing trust. (2) Amount at risk: a pecuniary legacy pays a fixed, certain amount regardless of when the beneficiary dies; an annuity's total value depends on how long the annuitant lives — early death benefits the estate, longevity costs it. (3) IHT: both reduce the residue of the estate available for IHT calculation, but the capitalised cost of an annuity must be estimated actuarially whereas a pecuniary legacy is a certain figure. (4) Income tax: a pecuniary legacy is capital in the beneficiary's hands (no income tax); an annuity generates taxable income for the recipient. (5) Drafting complexity: a pecuniary legacy is simple to draft and administer; an annuity requires careful provisions addressing what happens if the estate cannot fund the payments, abatement if assets are insufficient, and whether the annuity should be index-linked.

What should a will say to create an annuity legacy effectively?

To create a valid and workable annuity legacy, the will should: (1) Specify the amount clearly — an annual sum stated in pounds sterling, with or without an index-linking provision (e.g., RPI or CPI annually). (2) State the payment period — most commonly for the life of the named beneficiary, but it can be for a fixed number of years. (3) State the payment frequency — monthly, quarterly, or annually. (4) Decide how the obligation is to be discharged — either by the trustees paying from estate income/capital directly (which requires an ongoing trust), or by the executors purchasing a commercial annuity under s.28 AEA 1925. (5) Address abatement — if the estate is insufficient to fund the annuity, does it abate proportionally with other pecuniary legacies? (6) Address cessation — whether the annuity terminates on marriage/remarriage of the annuitant, or on any other event. Given the complexity, a solicitor should draft any annuity provision; amateur drafting can create significant uncertainty about the income tax and IHT position, or leave the estate open indefinitely.

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