Chapter 10 - Indirect investments

Question 1

Imka, who is a higher-rate taxpayer, dies at age 73 and nominates his uncrystallised defined contribution pension to go to his niece Sally. She is an additional-rate taxpayer and the pension fund is paid out to her within two years of Imka’s death. What rate of tax will Sally pay on withdrawals from the pension fund inherited from Imka?

Select one:

a. 45%.
b. 40%.
c. 0%.
d. 55%.

Answer 1

c. 0%.

chapter reference 10B6

Question 2

Jill invested into a non-qualifying UK investment bond when she was a higher-rate taxpayer. She transferred this to Gert, her husband, in 2017. He subsequently encashed it in November 2021 when, including the gain, he was a basic-rate taxpayer. What is the income tax position on the gain?

Select one:

a. Jill is liable for the gain and, as a higher-rate taxpayer, will pay an additional 25% tax.
b. Gert is liable for the gain and, as a basic-rate taxpayer, he will pay 20% tax.
c. Gert is liable for the gain and, as a basic-rate taxpayer, there is no further tax to pay.
d. Jill is liable for the gain and, as a higher-rate taxpayer, will pay 40% tax.

Answer 2

c. Gert is liable for the gain and, as a basic-rate taxpayer, there is no further tax to pay.

chapter reference 10G2D & G2G

Question 3

Angus invested £30,000 into a non-qualifying UK life assurance investment bond on 1 June 2016. He took a partial withdrawal of £4,000 on 1 November 2018 and a further partial withdrawal of £2,000 on 1 September 2020. He surrendered the bond in November 2021 for £32,000. What chargeable gain, if any, did Angus make on his investment in 2021/22?

Select one:

a. £4,000.
b. £2,000.
c. £8,000.
d. Nil.

Answer 3

c. £8,000.

chapter reference 10G2F

Question 4

Ian and Louise are married and they have two children aged 17 and 19. If none of the family have contributed into ISAs in 2021/22, what is the maximum investment that the family could make?

Select one:

a. £89,000.
b. £58,000.
c. £78,000.
d. £69,000.

Answer 4

a. £89,000.

chapter reference 10C1C

Question 5

A gain on the disposal of an asset is made on 1 June 2021. The capital gains tax liability for this disposal can be deferred if the gain is reinvested into an enterprise investment scheme, provided the reinvestment takes place between:

Select one:

a. 1 June 2021 and 31 May 2024.
b. 1 June 2020 and 31 May 2024.
c. 1 June 2020 and 31 May 2023.
d. 1 June 2021 and 31 May 2023.

Answer 5

b. 1 June 2020 and 31 May 2024.

chapter reference 10K5

Question 6

Stuart surrendered his non-qualifying offshore life assurance policy in July 2021 and made a gain of £12,000. Stuart owned the policy for nine years and during that time he was UK resident for three years and resident outside of the UK for six years. How much of the gain, if any, will be subject to UK income tax?

Select one:

a. £12,000.
b. £8,000.
c. None of it.
d. £4,000.

Correct, chapter reference 10H1

Answer 6

d. £4,000.

chapter reference 10H1

Question 7

Ada, who is a basic-rate taxpayer, receives gross income of £16,000 per annum from a purchased life annuity. Of this payment £6,000 is deemed to be a return of her original capital. How much income tax will be payable on Ada’s annuity income?

Select one:

a. £1,000.
b. £1,200.
c. £2,000.
d. £3,200.

Answer 7

c. £2,000.

chapter reference 10G4A

Question 8

William, who is an additional-rate taxpayer, disposed of a holding in an offshore non-reporting fund in June 2021 making a gain of £30,000. The gain is liable to tax of:

Select one:

a. £13,500.
b. £7,965.
c. £12,600.
d. £6,000.

Answer 8

a. £13,500.

chapter reference 10E2

Question 9

Paul has a non-qualifying offshore investment bond whilst Jane has a non-qualifying onshore investment bond. From a tax point of view:

Select one:

a. all gains are free of UK income tax as they are liable to capital gains tax instead.
b. neither are liable to capital gains tax liability on surrender, and all gains are free of income tax.
c. higher-rate tax is deducted at source within Paul’s fund, whilst Jane has no capital gains tax liability on surrender.
d. Paul’s income benefits from gross roll-up, whilst it is assumed that basic-rate tax is paid within Jane’s bond.

Answer 9

d. Paul’s income benefits from gross roll-up, whilst it is assumed that basic-rate tax is paid within Jane’s bond.

chapter reference 10H2

Question 10

Ryan invested into a non-qualifying UK life assurance investment bond in joint names with his wife Leanne five years ago, when they were both higher-rate taxpayers. Now Leanne has retired, her total gross pension income is £14,000 pa, while Ryan continues to pay higher-rate tax. If Ryan assigns his share of the bond to Leanne, they should be advised that:

Select one:

a. the assignment to Leanne would be a chargeable event for Ryan.
b. the assignment may not be possible if they have been taking 5% tax-deferred withdrawals from the bond.
c. Ryan can reserve the right to have his share transferred back to him.
d. Leanne may use the starting rate of tax and her personal savings allowance against any gains on encashment.

Answer 10

d. Leanne may use the starting rate of tax and her personal savings allowance against any gains on encashment.

chapter reference 10G2G

Question 11

Peter is an additional-rate taxpayer with an adventurous attitude to risk. He has recently made a gain of £50,000 on his investments and wants to avoid paying some or all of the capital gains tax now. Which investment options would be most tax efficient for him?

You must select ALL the correct options to gain the mark:

a. He could reinvest his gains into a seed enterprise investment scheme.
b. He could invest in gilts to reduce his capital gains tax liability.
c. He could invest in an enterprise investment scheme to reduce his income tax liability.
d. He could defer his gains by investing into an enterprise investment scheme.
e. He could defer his gains by investing into a new residential property.

Answer 11

a. He could reinvest his gains into a seed enterprise investment scheme.
c. He could invest in an enterprise investment scheme to reduce his income tax liability.
d. He could defer his gains by investing into an enterprise investment scheme.

Correct, chapter reference 10K

Question 12

Two sisters have the same amounts in offshore funds. Alice is a higher-rate taxpayer and has a non-reporting fund. Grace is a basic-rate taxpayer and has a reporting fund. What is the tax position?

Select one:

a. Alice will pay at least four times the rate of tax than Grace does if they are encashed at the same time.
b. Alice will not pay any more tax than Grace on sale of the funds.
c. Grace will pay less capital gains tax than Alice on disposal of their holdings.
d. Grace will pay less income tax than Alice before they sell their holdings.

Answer 12

a. Alice will pay at least four times the rate of tax than Grace does if they are encashed at the same time.

chapter reference 10E

Question 13

In September 2021 Greta gifted £100,000 into an absolute trust for the benefit of her grandson, Frank, aged 12. The £100,000 was invested into a non-qualifying UK life assurance policy. In the event of the policy being surrendered, any income tax liability on a gain will be the liability of:

Select one:

a. Frank’s parents equally.
b. The trustees.
c. Greta.
d. Frank.

Answer 13

d. Frank.

chapter reference 10I1

Question 14

Alice has just emigrated to Australia and will be non UK resident from the start of the current tax year. If she has an ISA, she:

Select one:

a. can retain the ISA but without the tax benefits.
b. can retain the ISA with its tax benefits and can continue to pay into it for so long as she retains her UK domicile.
c. can retain the ISA with its tax benefits but cannot pay in any more money until UK residence is resumed.
d. must encash the ISA when ceasing to be UK resident for tax purposes.

Answer 14

c. can retain the ISA with its tax benefits but cannot pay in any more money until UK residence is resumed.

chapter reference 10C1E

Question 15

Mavis has an offshore investment that has reporting status. If she is a basic-rate taxpayer and expects to remain so after encashing the offshore investment, how will this be taxed?

You must select ALL the correct options to gain the mark:

a. The capital gains tax annual exempt amount could be used to offset any gain.
b. Gains on encashment will be subject to income tax at 20%.
c. Dividends will be taxed at 7.5%.
d. Any gains on encashment will be taxed at 32.5%.
e. Any gains on encashment will be subject to capital gains tax at 10%.
f. She would not be able to offset any income against the dividend allowance.

Answer 15

a. The capital gains tax annual exempt amount could be used to offset any gain.
c. Dividends will be taxed at 7.5%.
e. Any gains on encashment will be subject to capital gains tax at 10%.

chapter reference 10E1

Question 16

What is the tax treatment of the income received from a purchased life annuity?

Select one:

a. The capital element will not be taxable, but the interest element is taxed as savings income.
b. Both the capital and interest elements will be paid without any liability to tax providing the total payment is less than £12,570 per annum.
c. Both the capital and interest element will be taxed as savings income.
d. The capital element will be taxable as pension income and the interest element will be taxable as savings income.

Answer 16

a. The capital element will not be taxable, but the interest element is taxed as savings income.

chapter reference 10G4A

Question 17

Susan, with earnings of £95,000, has invested £40,000 into an enterprise investment scheme. As a result her income tax liability will reduce by a maximum of:

Select one:

a. £16,000.
b. £12,000.
c. £8,000.
d. £4,000.

Answer 17

b. £12,000.

chapter reference 10K1

Question 18

If Sanjeev wants to invest into an ISA for the first time, what eligibility criteria must he meet?

You must select ALL the correct options to gain the mark:

a. A joint ISA can be arranged, but only between spouses or civil partners.
b. He must be domiciled in the UK.
c. The cash invested in an ISA must belong to him.
d. A non-resident Crown employee working overseas can open an ISA.
e. He must be resident in the UK.
f. An individual aged 16 can invest in a stocks and shares ISA.

Answer 18

c. The cash invested in an ISA must belong to him.
d. A non-resident Crown employee working overseas can open an ISA.
e. He must be resident in the UK.

chapter reference 10C1A

Question 19

Lionel, a higher-rate taxpayer, has a tax liability for 2021/22 of £16,500. He has recently invested £30,000 into a venture capital trust and as a result his tax liability will reduce to:

Select one:

a. £7,500.
b. £10,500.
c. £13,200.
d. £11,550.

Answer 19

a. £7,500.

chapter reference 10L1

Question 20

Dominic wishes to diversify his investment portfolio and is thinking of investing in real estate investment trusts. He should be aware that:

You must select ALL the correct options to gain the mark:

a. they are exempt from corporation tax in all circumstances.
b. the non-exempt element is taxable as UK dividend income.
c. the tax-exempt element is classed as property income.
d. they can be held within an ISA.
e. they are particularly suitable for a growth portfolio.

Answer 20

b. the non-exempt element is taxable as UK dividend income.
c. the tax-exempt element is classed as property income.
d. they can be held within an ISA.

Correct, chapter reference 10J3

Question 21

If Jaya is considering investing in a real estate investment trust [REIT], what are the tax benefits of her doing so?

You must select ALL the correct options to gain the mark:

a. REIT shares can be held in an ISA and income and gains are tax-exempt.
b. Investments into a REIT qualify for 30% income tax relief.
c. A payment from the tax-exempt element is paid net of 20% tax.
d. Gains on REIT shares are always free of capital gains tax.
e. A payment from the tax-exempt element is classed as property income and paid gross.

Answer 21

a. REIT shares can be held in an ISA and income and gains are tax-exempt.
c. A payment from the tax-exempt element is paid net of 20% tax.

chapter reference 10J3

Question 22

Wang, an additional-rate taxpayer, is contemplating a £100,000 investment into a venture capital trust [VCT]. From a tax point of view:

Select one:

a. he will get 30% tax relief on his investment and can ‘defer’ capital gains from another investment into the VCT.
b. any gains in this investment will be exempt from capital gains tax immediately.
c. he will be taxed on any dividends he receives unless he holds the shares for 5 years.
d. he will get 50% tax relief on his investment and the VCT will be exempt from inheritance tax after 2 years

Answer 22

b. any gains in this investment will be exempt from capital gains tax immediately.

chapter reference 10L1

Question 23

In what ways are structured products potentially useful to help mitigate inheritance tax [IHT] for someone with limited life expectancy?

You must select ALL the correct options to gain the mark:

a. Structured products can easily be encashed to pay an IHT bill.
b. The probate value of the investment could be less than the amount invested.
c. Beneficiaries will receive the full value of the structured product on maturity regardless of probate value.
d. Transfers to structured products are exempt from IHT if the donor is expected to have less than 12 months to live.
e. Growth on a structured product is always outside the investor’s estate.

Answer 23

b. The probate value of the investment could be less than the amount invested.
c. Beneficiaries will receive the full value of the structured product on maturity regardless of probate value.

chapter reference 10F2

Question 24

Janice put a life policy into trust 5 years ago, with UK based trustees and beneficiaries. The policy incurred a chargeable event in the 2021/22 tax year and Janice subsequently died later in the tax year. How will the chargeable gain be taxed?

Select one:

a. The trustees can choose who they want the tax liability to fall on.
b. The trustees would be liable for any tax due.
c. The beneficiaries would be liable for any tax due, but can recover it from the trustees.
d. Any gain would be treated as part of Janice’s income and any tax paid by the trustees can be recovered

Answer 24

d. Any gain would be treated as part of Janice’s income and any tax paid by the trustees can be recovered

chapter reference 10I1

Question 25

Jenny has realised gains on her investments of £200,000 and is considering investing £200,000 into a venture capital trust [VCT]. Her income tax liability for 2021/22 is £40,000 and she has been advised that:

You must select ALL the correct options to gain the mark:

a. disposals are exempt from capital gains tax providing she holds the shares for at least two years.
b. it is not possible to defer capital gains tax by reinvesting in VCT shares.
c. income tax relief is generally withdrawn if the shares are disposed of within five years.
d. the dividend will be taxed at her pre-investment tax rate.
e. income tax relief will be restricted to £40,000.

Answer 25

b. it is not possible to defer capital gains tax by reinvesting in VCT shares.
c. income tax relief is generally withdrawn if the shares are disposed of within five years.
e. income tax relief will be restricted to £40,000.

Correct, chapter reference 10L1

Question 26

Mary is an additional-rate taxpayer with a large capital gains tax liability this tax year. If she makes an investment into an enterprise investment scheme, what is the maximum cumulative income tax and capital gains tax benefit she could enjoy and when is the earliest time this percentage would apply to her?

Select one:

a. 58% after three years of investment.
b. 50% after three years of investment.
c. 38% after two years of investment.
d. 50% after two years of investment.

Answer 26

a. 58% after three years of investment.

chapter reference 10K5

Question 27

Frankie is 17 and pays £1,500 into a cash ISA whilst her sister Anne is 21 and pays £1,500 into a stocks and shares ISA. What is the maximum additional amount that they can personally pay into cash ISAs in total in 2021/22?

Select one:

a. £26,000.
b. £41,368.
c. £37,000.
d. £46,000.

Answer 27

d. £46,000.

chapter reference 10C1C

Question 28

£20,000 was invested in a UK single premium investment bond on 1 November 2020 and by 31 October 2021 it had fallen in value to £18,000. If a part surrender of £3,500 was taken on 31 October 2021, what, if anything, would be the chargeable gain?

Select one:

a. £1,500.
b. £2,500.
c. Nil.
d. £3,500.

Answer 28

b. £2,500.

chapter reference 10G2F

Question 29

Stephen, a higher-rate taxpayer, is considering whether to invest in an onshore or offshore bond. Concerning taxation of the funds:

You must select ALL the correct options to gain the mark:

a. for onshore bonds, gains are taxed at 20% for higher-rate taxpayers and 25% for additional-rate taxpayers.
b. for an offshore bond, tax is charged on the gross return.
c. an onshore bond incurs tax within the fund of 10%.
d. over the longer term, he may achieve a higher net return with an offshore bond.

Answer 29

a. for onshore bonds, gains are taxed at 20% for higher-rate taxpayers and 25% for additional-rate taxpayers.
b. for an offshore bond, tax is charged on the gross return.
d. over the longer term, he may achieve a higher net return with an offshore bond.

chapter reference 10H2

Question 30

Josh, an additional-rate taxpayer, has an income tax liability for 2021/22 of £78,000. If he invests £200,000 into an enterprise investment scheme, his tax liability will reduce to:

Select one:

a. £62,400.
b. £18,000.
c. £38,000.
d. £58,000.

Answer 30

b. £18,000.

chapter reference 10K1

Question 31

Sanjay is in good health and about to retire. He is looking for an annuity into which he can invest part of his tax free cash sum in order to generate additional income. Which type of annuity is he most likely to use to achieve this?

Select one:

a. Enhanced annuity.
b. Scheme pension.
c. Lifetime annuity.
d. Purchased life annuity.

Answer 31

d. Purchased life annuity.

chapter reference 10G4

Question 32

Cormack is interested in having an exposure to international commercial property in his portfolio to provide potential gains and ongoing income, but has neither the time or the knowledge to buy directly. The most appropriate solution for him would be a[n]:

Select one:

a. special purpose vehicle.
b. UK real estate investment trust.
c. property security fund.
d. insurance company property fund.

Answer 32

c. property security fund.

chapter reference 10J5

Question 33

When considering the taxation of annuities:

You must select ALL the correct options to gain the mark:

a. an annuity for a beneficiary under a will is taxed in full as savings income.
b. pension annuities are taxed in full as earned income.
c. a deferred annuity is taxed as a purchased life annuity when the annuity is taken.
d. purchased life annuities are taxed in full as earned income.
e. a cash sum payable under a guaranteed annuity is fully taxable as investment income.

Answer 33

a. an annuity for a beneficiary under a will is taxed in full as savings income.
b. pension annuities are taxed in full as earned income.
c. a deferred annuity is taxed as a purchased life annuity when the annuity is taken.

chapter reference 10G4

Question 34

Jeremy’s investment portfolio has grown significantly and he has now set up a limited partnership special purpose vehicle. This would suggest that:

You must select ALL the correct options to gain the mark:

a. he is an experienced investor.
b. he wishes to invest for at least 10 years.
c. his objective is capital growth.
d. he aims to create additional income.
e. he is interested in the commercial property market.

Answer 34

a. he is an experienced investor.
c. his objective is capital growth.
e. he is interested in the commercial property market.

chapter reference 10J1

Question 35

Stephen, who has earnings of £55,000 for 2021/22, invested £80,000 into an offshore bond on 1 August 2013. He took seven regular annual withdrawals of £3,000 before fully encashing the bond for £78,000 on 1 September 2021. If he has no other savings income, the income tax liability from this investment would be:

Select one:

a. £7,400.
b. £3,800.
c. nil.
d. £7,600.

Answer 35

a. £7,400.

chapter reference 10H2

Question 36

Polly, who has two children aged 16 and 17, wishes to fund the maximum possible into ISAs for both of them. Polly should be aware that:

You must select ALL the correct options to gain the mark:

a. she could arrange the ISA under trust if she wished.
b. gross income of over £100 per year from a cash ISA will be taxed as her income.
c. the children would be eligible for both a cash ISA up to £20,000 and a junior ISA of up to £9,000.
d. she could arrange a joint junior ISA for both of her children.
e. to be eligible under the ISA rules, Polly must first gift the money to the children.

Answer 36

b. gross income of over £100 per year from a cash ISA will be taxed as her income.
c. the children would be eligible for both a cash ISA up to £20,000 and a junior ISA of up to £9,000.
e. to be eligible under the ISA rules, Polly must first gift the money to the children.

Correct, chapter reference 10C1A

Question 37

The life fund of Giorgio’s existing with-profits bond is taxed:

You must select ALL the correct options to gain the mark:

a. at 20% on any gains arising from the sale of assets from the fund.
b. but this tax cannot be reclaimed by Giorgio as a policyholder.
c. at 40% on offshore based assets, such as shares.
d. at 20% on property rental income.
e. on dividend income from UK shares at 10%.

Answer 37

a. at 20% on any gains arising from the sale of assets from the fund.
b. but this tax cannot be reclaimed by Giorgio as a policyholder.
d. at 20% on property rental income.

chapter reference 10G2A

Question 38

Ellen, an additional-rate taxpayer, invested £150,000 into an offshore bond on 1 January 2017. She took five regular withdrawals of £7,500, which were taken on 1 September each year. She fully encashed the bond for £155,000 on 1 January 2022. The tax owing will be:

Select one:

a. £21,250.
b. £8,500.
c. £19,125.
d. £17,000.

Answer 38

c. £19,125.

chapter reference 10H2

Question 39

Eloise has a 25 year endowment with 9 years remaining to maturity and she is considering selling the policy on the open market. If she does so:

You must select ALL the correct options to gain the mark:

a. the new legal owner will maintain future premiums.
b. the purchaser of the policy is entitled to the maturity proceeds.
c. and if Eloise dies in the next nine years, the death benefits are paid to her beneficiaries.
d. Eloise may have income tax to pay on the sale proceeds of the policy.
e. Eloise may have to pay capital gains tax on any gains.

Answer 39

a. the new legal owner will maintain future premiums.
b. the purchaser of the policy is entitled to the maturity proceeds.

Correct, chapter reference 10G2H

Question 40

Gail, a basic-rate taxpayer, is considering using some of her savings to buy a purchased life annuity. She should be aware that:

You must select ALL the correct options to gain the mark:

a. the income will be paid gross and the tax owed will be collected via self-assessment.
b. each payment includes a return of capital which is not taxable.
c. the capital content is calculated by taking the purchase price of the annuity and dividing it by 20.
d. the interest element will be taxed as savings income at 20%.

Answer 40

b. each payment includes a return of capital which is not taxable.
d. the interest element will be taxed as savings income at 20%.

chapter reference 10G4A

Question 41

Penal tax is charged to a pension fund if it invests in certain types of assets, which include:

Select one:

a. residential property and tangible moveable assets.
b. commercial and residential property.
c. foreign currency and overseas government bonds.
d. shares in companies on the Alternative Investment Market.

Answer 41

a. residential property and tangible moveable assets.

chapter reference 10B8

Question 42

Jeff invested £20,000 into a five-year non-qualifying single premium policy on 1 January 2017. He withdrew £1,000 as a part surrender on 1 January 2018 and £1,000 as a part surrender on 1 January 2019. What would the chargeable gain be at maturity if the bond was valued at £28,000?

Select one:

a. £8,000.
b. £3,000.
c. £10,000.
d. £5,000.

Answer 42

c. £10,000.

chapter reference 10G2F

Question 43

Sarah is an additional-rate taxpayer with a large capital gains tax liability this tax year following the sale of a share portfolio. If she makes an investment into a seed enterprise investment scheme, what is the maximum cumulative income tax and capital gains tax benefit she could enjoy?

Select one:

a. 60%.
b. 50%.
c. 58%.
d. 64%.

Answer 43

a. 60%.

chapter reference 10K6

Question 44

Roger is interested in taking out an exempt friendly society policy. He should be aware that:

You must select ALL the correct options to gain the mark:

a. if a chargeable gain occurs on a qualifying policy the full rate of income tax is payable.
b. he must be at least aged 18 to take out a policy.
c. the fund itself is less tax efficient than an ordinary life office fund.
d. the maximum annual premium is £270.
e. investment growth will be free of both income and capital gains tax.

Answer 44

a. if a chargeable gain occurs on a qualifying policy the full rate of income tax is payable.
d. the maximum annual premium is £270.
e. investment growth will be free of both income and capital gains tax.

Correct, chapter reference 10G3

Question 45

Sue has a current personal pension fund value of £380,000. She has no form of transitional protection. In the event of her death before the age of 75, the maximum additional lump sum death benefit that can be paid from her other uncrystallised money purchase pensions without incurring a tax charge is:

Select one:

a. £675,000.
b. £693,100.
c. £598,100.
d. £1,055,000.

Answer 45

b. £693,100.

chapter reference 10B6

Question 46

XYZ have assets of £13m and qualify for the enterprise investment scheme [EIS]. What is the maximum amount they could raise under the EIS?

Select one:

a. £2m.
b. £5m.
c. £3m.
d. £10m.

Answer 46

c. £3m.

chapter reference 10K2

Question 47

Irene took out a qualifying onshore endowment policy with a term of 10 years, which she made paid-up in year 7. This means she will become liable to tax on the proceeds:

You must select ALL the correct options to gain the mark:

a. upon settlement of a critical illness claim.
b. on death before surrender.
c. at maturity.

Correct, chapter reference 10G2C

d. upon assigning a mortgage.

Answer 47

b. on death before surrender.
c. at maturity.

chapter reference 10G2C

Question 48

Jeremy, aged 45, earns £70,000 per annum. He is keen to build up funds that can be used to provide an income in retirement and is considering a lump sum payment into either a personal pension or an ISA. In deciding between these, he should be aware that:

You must select ALL the correct options to gain the mark:

a. he can contribute more to the pension.
b. he can access his pension funds when he reaches age 50.
c. the ISA funds are more tax efficient.
d. the pension can only provide 25% of the fund as a tax-free lump sum.
e. he will pay his pension contributions net of basic rate tax.

Answer 48

a. he can contribute more to the pension.
d. the pension can only provide 25% of the fund as a tax-free lump sum.
e. he will pay his pension contributions net of basic rate tax.

chapter reference 10B/10C

Question 49

David purchased a pension annuity with £50,000 from his personal pension and his twin Paul purchased a purchased life annuity with £50,000 taken from his building society account. If the same annuity rate applied to both annuities and they are both basic-rate taxpayers:

Select one:

a. David’s annuity will be paid gross.
b. Paul will receive a higher net income than David.
c. David will receive part of his income tax-free.
d. Paul’s annuity will all be treated as non-savings income.

Answer 49

b. Paul will receive a higher net income than David.

chapter reference 10G4

Question 50

Mario, a higher-rate taxpayer, invested £20,000 in 2011 in a non-reporting offshore fund. The current value is £45,000 and he is considering realising his investment. What are the most appropriate issues that Mario should consider before encashment?

You must select ALL the correct options to gain the mark:

a. Mario will have a £25,000 gain with a £5,000 income tax liability.
b. If Mario assigned the non-reporting fund to his wife [a basic-rate taxpayer], the income tax liability would be £5,000.
c. Mario will be able to deduct the capital gains tax annual exempt amount.
d. Splitting the encashment over two tax years will reduce his overall tax liability.
e. Mario will have a £25,000 gain with a £10,000 income tax liability.

Answer 50

b. If Mario assigned the non-reporting fund to his wife [a basic-rate taxpayer], the income tax liability would be £5,000.
e. Mario will have a £25,000 gain with a £10,000 income tax liability.

chapter reference 10E2

Question 51

Julie is 17 and Sue is 23. They have each invested £2,000 into their ISAs, and both wish to invest more in the 2021/22 tax year. What are their options?

You must select ALL the correct options to gain the mark:

a. Julie can only invest a further £7,000.
b. Sue can invest a further £18,000 but at least £9,000 of it must be in stocks and shares.
c. Sue can invest a further £18,000.
d. Julie can invest a further £27,000.
e. Julie can invest a further £18,000 but it must be in cash ISAs only.

Answer 51

c. Sue can invest a further £18,000.
d. Julie can invest a further £27,000.

chapter reference 10C1C

Question 52

In order to be exempt from corporation tax, a real estate investment trust must ensure that:

You must select ALL the correct options to gain the mark:

a. a minimum of 75% of its gross profits must derive from rents.
b. rental profits must exceed loan interest charges by at least 25%.
c. at least 50% of the assets must be used to purchase commercial property.
d. a minimum of 25% of rental income must be retained within the fund.
e. a minimum of 80% of rental income must be distributed to investors.
f. a minimum of 90% of rental income must be paid as a dividend to investors.

Answer 52

a. a minimum of 75% of its gross profits must derive from rents.
b. rental profits must exceed loan interest charges by at least 25%.
f. a minimum of 90% of rental income must be paid as a dividend to investors.

chapter reference 10J3

Question 53

Bjorn holds shares in a closed-ended investment company based in Dublin, medium-term loan notes issued by a UK bank, and a UK-based deposit account. As a result, the tax consequences of holding these investment is that:

You must select ALL the correct options to gain the mark:

a. capital gains in all these investments are subject to capital gains tax in the usual way.
b. income from the medium-term loan notes and deposit accounts are taxed as savings income.
c. the dividend allowance is available to use against the income from the shares in the closed-ended investment company.
d. all these investments can be tax-exempt if held within a stocks and shares ISA.

Answer 53

b. income from the medium-term loan notes and deposit accounts are taxed as savings income.
d. all these investments can be tax-exempt if held within a stocks and shares ISA.
c. the dividend allowance is available to use against the income from the shares in the closed-ended investment company.

chapter reference 10F3

Question 54

Gemma, whose taxable income is £40,000 after deducting the personal allowance, has realised a chargeable gain of £20,000 on an onshore life policy. When calculating the taxation due on this gain, she:

You must select ALL the correct options to gain the mark:

a. must pay income tax on the full gain at 40%.
b. can offset some of the gain by taking into account her capital gains tax annual exempt amount.
c. must top-slice the gain by the number of years held to determine the rate of tax she will pay on the gain.
d. may assume that 20% tax has already been paid in the fund and this amount can be deducted from any tax that is due.
e. can take into account the personal savings allowance if it has not already been used up.

Answer 54

d. may assume that 20% tax has already been paid in the fund and this amount can be deducted from any tax that is due.
e. can take into account the personal savings allowance if it has not already been used up.

chapter reference 10G2G

Question 55

Bert is about to retire and take benefits from his employer’s defined contribution pension scheme. His options for drawing income are:

Select one:

a. flexible drawdown or a secured pension in the form of an lifetime annuity.
b. a secured pension in the form of a lifetime annuity, an uncrystallised pension lump sum or flexi-access drawdown.
c. flexible drawdown or capped drawdown.
d. flexi-access drawdown, uncrystallised pension lump sum, or capped drawdown.

Answer 55

b. a secured pension in the form of a lifetime annuity, an uncrystallised pension lump sum or flexi-access drawdown.

chapter reference 10B7

Question 56

Wendy paid £30,000 into a non-qualifying single premium life assurance policy on 4 September 2016. She took a partial surrender of £1,500 on 5 May 2017 and one of £4,500 on 6 June 2018. The policy matured on 4 September 2021 with a value of £32,000. How much will the chargeable gain on maturity be?

Select one:

a. £6,500.
b. £8,000.
c. £2,000.
d. £5,000.

Answer 56

d. £5,000.

chapter reference 10G2F

Question 57

The anti-avoidance rules are designed to prevent people exploiting pension flexibility by:

You must select ALL the correct options to gain the mark:

a. not allowing further contributions once a pension is in payment.
b. capping the contributions of higher earners at £240,000 gross a year.
c. imposing a reduced annual allowance once a pension is accessed.
d. introducing a tapered reduction to the amount of the annual allowance for higher earners.
e. taxing the death benefit if a pension member dies before age 75.

Answer 57

c. imposing a reduced annual allowance once a pension is accessed.
d. introducing a tapered reduction to the amount of the annual allowance for higher earners.

chapter reference 10B1

Question 58

Ursula, an additional-rate taxpayer aged 50, is considering investing in an offshore bond. If she did so and then later encashes the bond whilst a basic-rate taxpayer, she benefits because:

Select one:

a. she will pay 20% tax liability on all or part of the chargeable gains as opposed to 45%.
b. top slicing will reduce all of her gain so that it stays in the basic rate band.
c. she will have no further tax liability on all or part of the chargeable gains as opposed to 25%.
d. her fund will be taxed at 20% rather than 45%.

Answer 58

a. she will pay 20% tax liability on all or part of the chargeable gains as opposed to 45%.

chapter reference 10H2

Question 59

William has an endowment policy and he has been advised that the proceeds could be subject to income tax on maturity as the policy does not meet the qualifying rules. What would NOT be a contributing factor to this potential tax liability?

Select one:

a. The term of the policy is 8 years.
b. The policy is on a single life basis.
c. The policy was taken out in May 2013.
d. The premiums are £400 per month.

Answer 59

b. The policy is on a single life basis.

chapter reference 10G1

Question 60

Bob, an additional-rate taxpayer, has received £50 from the non tax-exempt element from his UK real estate investment trust. How will this payment be treated for tax purposes?

Select one:

a. As savings income.
b. As property income.
c. As UK dividend income.
d. The payment will be ignored for tax purposes as it was below £100.

Answer 60

c. As UK dividend income.

chapter reference 10J3

Question 61

Bill is married and has taxable income after deduction of his personal allowance of £58,000 in 2021/22. He invested £20,000 into an onshore single premium life assurance bond on 31 October 2011, and for 10 years he took the maximum permitted withdrawals without triggering an immediate tax charge. On encashment on 14 November 2021 the policy is worth £22,000. For the purposes of calculating the tax due on encashment, he should be advised that:

Select one:

a. top-slicing relief will reduce the tax charged on his gain.
b. it may have been advantageous to assign the bond to his wife before encashment.
c. his personal savings allowance cannot be used.
d. a copy of the chargeable event certificate will be sent to HMRC.

Answer 61

b. it may have been advantageous to assign the bond to his wife before encashment.

chapter reference 10G2G/10G2I

Question 62

Ffion, a higher-rate taxpayer, recommenced paying £1,000 per month into her personal pension from August 2021. She then intends to pay a single premium contribution later in the same tax year. Which factors are most relevant to her?

You must select ALL the correct options to gain the mark:

a. Being a higher-rate taxpayer, her annual allowance will always be subject to taper relief.
b. In making the lump sum payment, she can ignore her monthly contributions when testing against the annual allowance.
c. She may be able to contribute more than £40,000 gross in total to the pension plan in 2021/22.
d. She must take into account her employer’s pension contributions.
e. The size of her pension fund in relation to the lifetime allowance.

Answer 62

c. She may be able to contribute more than £40,000 gross in total to the pension plan in 2021/22.
d. She must take into account her employer’s pension contributions.
e. The size of her pension fund in relation to the lifetime allowance.

Correct, chapter reference 10B

Question 63

Sergio, a higher-rate taxpayer, has invested £30,000 into a venture capital trust [VCT] in this tax year. If he received dividends on his VCT investment this year totalling £300, he will:

Select one:

a. be subject to higher-rate tax on the dividend but any gains are exempt from capital gains tax and the value of the VCT is exempt from inheritance tax.
b. have no income tax to pay on his VCT dividends and the value of the VCT is exempt from inheritance tax.
c. only be subject to basic-rate tax on the VCT dividends and he will be exempt from any gains if the VCT is held for 5 years.
d. have no income tax to pay on his VCT dividends and any gains on disposal are exempt from capital gains tax.

Answer 63

d. have no income tax to pay on his VCT dividends and any gains on disposal are exempt from capital gains tax.

chapter reference 10L1

Question 64

Mary, who is 45 and has no earned income, pays £100 per month net into her pension. She is married to Jeff, 46, who is a higher-rate taxpayer with a pension fund valued at £600,000. Regarding their respective pensions:

You must select ALL the correct options to gain the mark:

a. Mary’s pension provider uses the net pay arrangement when paying into her personal pension plan.
b. Mary will be able to pay at least an additional £1,680 net this year into her pension.
c. on death before the age of 75, Jeff’s pension fund would be paid as a tax-free lump sum death benefit up to the lifetime allowance.
d. they will both need to be age 67 before taking pensions from their group personal pension plans.
e. Jeff is likely to pay 40% marginal income tax on any contribution in excess of the annual allowance.

Answer 64

b. Mary will be able to pay at least an additional £1,680 net this year into her pension.
c. on death before the age of 75, Jeff’s pension fund would be paid as a tax-free lump sum death benefit up to the lifetime allowance.
e. Jeff is likely to pay 40% marginal income tax on any contribution in excess of the annual allowance.

Correct, chapter reference 10B1/10B3/ 10B6

Question 65

Roxanne has earnings of £105,000 and makes a pension contribution of £40,000 in 2021/22. She made contributions of £30,000 in 2020/21, £20,000 in 2019/20 and £10,000 in 2018/19. How much more could Roxanne contribute this year using carry forward assuming she is not subject to tapering and has not flexibly accessed any of her pensions?

Select one:

a. £30,000.
b. £60,000.
c. Nil.
d. £40,000.

Answer 65

b. £60,000.

chapter reference 10B1/10B2

Question 66

Natalie own shares in a property company listed on the London Stock Exchange. In what ways does this investment differ from a direct property holding?

You must select ALL the correct options to gain the mark:

a. The value of the investment can be affected adversely by stock market factors.
b. Share prices are affected by the quality of management and the level of borrowing.
c. The investment is spread over a number of different properties.
d. The value of the property shares tends to move less rapidly than the property market generally.
e. The investment is less liquid than direct property holdings.

Answer 66

a. The value of the investment can be affected adversely by stock market factors.
b. Share prices are affected by the quality of management and the level of borrowing.
c. The investment is spread over a number of different properties.

chapter reference 10J2

Question 67

Sami has a flexible cash ISA and has contributed £8,000 into this. If she withdraws £2,000 to pay for repairs to her car, what option does she have to make further ISA contributions in the current tax year?

You must select ALL the correct options to gain the mark:

a. She could contribute up to £14,000 further in a stocks and shares ISA.
b. She could contribute up tor £14,000 further into her existing ISA.
c. She is not able to make additional contributions into the ISA in the current tax year.
d. She could invest up to £12,000 into her existing LISA and, in addition, pay an extra £4,000 per year into a LISA.
e. She could invest up to £12,000 further into another provider’s cash ISA.

Answer 67

a. She could contribute up to £14,000 further in a stocks and shares ISA.
b. She could contribute up tor £14,000 further into her existing ISA.

chapter reference 10C1C

Question 68

Meena has sold some shares making a gain of £50,000 and has an income tax liability of £30,000. She wishes to invest in an enterprise investment scheme [EIS]. What do you advise her to consider?

You must select ALL the correct options to gain the mark:

a. Enterprise investment schemes are ideally suited for medium risk investors.
b. To eliminate her income tax liability completely, Meena would need to invest £100,000 in qualifying investments.
c. Meena can defer the capital gains tax due on up to 100% of the gain, and disposals of qualifying EIS shares are normally exempt from capital gains tax if held for three years.
d. There may be pre-arranged exit provisions in order to minimise risk.
e. Meena does need not to be resident in the UK, but must be liable to UK income tax.
f. Meena will be able to invest £50,000 and receive income tax relief of £10,000.

Answer 68

b. To eliminate her income tax liability completely, Meena would need to invest £100,000 in qualifying investments.
c. Meena can defer the capital gains tax due on up to 100% of the gain, and disposals of qualifying EIS shares are normally exempt from capital gains tax if held for three years.
e. Meena does need not to be resident in the UK, but must be liable to UK income tax.

chapter reference 10K1

Question 69

A chargeable event for a non-qualifying life assurance policy occurs in the event of the:

You must select ALL the correct options to gain the mark:

a. maturity of the policy.
b. policy being assigned by way of mortgage to a bank.
c. death of the life assured.
d. surrender of the policy.
e. payment of a critical illness benefit.
f. policy being assigned to the policyholder’s spouse.

Answer 69

a. maturity of the policy.
c. death of the life assured.
d. surrender of the policy.

chapter reference 10G2C

Question 70

Jim, a higher-rate taxpayer, has recently encashed his offshore fund which has reporting fund status making a gain of £10,000. Denys, a basic-rate taxpayer, has made the same gain on his offshore fund which does not have reporting status. Neither has made any other capital gains in this tax year. Who would pay more tax and by how much?

Select one:

a. Jim, by £1,000.
b. Jim, by £2,000.
c. Denys, by £4,000.
d. Denys, by £2,000.

Answer 70

d. Denys, by £2,000.

chapter reference 10E1/10E2

Question 71

Kevin holds a stocks and shares ISA and he wishes to widen the investments he currently holds within it. Kevin:

You must select ALL the correct options to gain the mark:

a. can only hold cash if it is for the purpose of future investment.
b. can invest in shares listed on the Alternative Investment Market.
c. cannot invest in corporate bonds.
d. can invest in a life assurance policy.
e. cannot hold an investment trust.

Answer 71

b. can invest in shares listed on the Alternative Investment Market.
d. can invest in a life assurance policy.

chapter reference 10C1B

Question 72

A tax charge may be triggered when a pension fund invests in which type of asset?

Select one:

a. Residential property.
b. Gilts.
c. Commercial property.
d. Cash.

Answer 72

a. Residential property.

chapter reference 10B8