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 Imkals death. What rate of tax will Sally pay on withdrawals from the pension fund inherited from Imka?

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

Answer 1

b. 0%.

Death benefits from defined contribution (DC) schemes (also known as money purchase arrangements) paid on deaths occurring before age 75 are tax free. However, benefits must either be paid out or designated to drawdown within two years of the date of death to retain the tax-free status. Otherwise, the benefits will be subject to income tax under PAYE in the hands of the recipient.

For deaths occurring on or after age 75, any lump sum death benefits or death benefits payable as an income are subject to income tax under PAYE in the hands of the recipient.

Question 2

Luke has an income tax liability in 2023/24 of £6,000. If he makes a contribution into a venture capital trust of £25,000, how much income tax relief will he actually receive?

a. £12,500
b. £7500
c. £6000
d. £5000

Answer 2

c. £6000

Individuals who are aged at least 18 can obtain income tax relief at 30% on investments of up to £200,000 per tax year in newly issued ordinary shares in VCTs.

• The relief is given by means of an income tax reduction, along the lines of ElS relief.
• Dividends from investments in VCTs of up to £200,000 per tax year are tax free.

30% of £25,000 = £7500

£7500 > £6000 the relief given is more than the income tax liability, meaning that the full £6000 tax liability is now eligible for relief

Question 3

William, who is an additional-rate taxpayer, disposed of a holding in an offshore non-reporting fund in June 2023 making a gain of £30,000.
The gain is liable to tax of.

a £12600.
b. £7965.
c. £13500
d. £6000.

Answer 3

c. £13500

• Any income that accrues to the fund is usually accumulated. Income is not taxed as it arises, only on disposal of units/shares.

• The gain (called an offshore income gain on any disposal, including on the death of the investor, is calculated on CT principles (without the annual exempt amount), but is subject to income tax in the tax year of encashment. Any income that has been accumulated will constitute part of the gain.

• Because the gain is liable to income tax it is charged at the 20% basic rate, the 40% higher rate or the 45% additional rate. The personal savings allowance, the dividend allowance and the starting rate for savings income cannot be used against the gain.

Question 4

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?

а. £2000
b. £1000
c. £1200
d. £3200

Answer 4

а. £2000

Purchased life annuities are split into a capital element (the capital content) and an interest element. The capital content is deemed to be a part return of the annuitant’s original capital and as such is not taxable. Only the interest element is taxable and is taxed as savings income. Tax is usually deducted at source.

Question 5

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

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

Answer 5

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

In an onshore fund, management expenses are generally deductible from the fund’s income for tax purposes. An offshore fund has no tax from which to deduct management expenses, thus reducing the effect of gross roll-up.

Onshore bonds are taxed within the funds for basic rate, where offshore are taxed fully on encashment. The benefit here is onshore bonds will hence be taxed as 20% then for higher/additional 20%/25% on top of that as opposed to the full amount upon encashment

£10,000 in onshore for higher rate

(£10,000 x 0.8) x 0.8 = £6,400

£10,000 in offshore for higher rate

£10,000 x 0.6 = £6000

So the benefit of onshore is £400 in tax

Question 6

A gain on the disposal of an asset is made on 1 June 2023. 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:

a. 1 June 2022 and 31 May 2026
b. 1 June 2023 and 31 May 2026.
c. 1 June 2022 and 31 May 2025.
d. 1 June 2023 and 31 May 2025.

Answer 6

a. 1 June 2022 and 31 May 2026

Individuals can defer chargeable gains on any assets by reinvesting the gain in shares that qualify under the EIS. This makes the maximum potential tax relief 58% (30% income tax and deferral of a CT liability of up to 28% (for a residential property gain)).

• To claim this relief, the investor must be resident in the UK.
• The reinvestment must take place within a period starting one year before and ending three years after the disposal, giving rise to the chargeable gain.

Question 7

In May 2023, Alice gifted £50,000 into an absolute trust for the benefit of her grandson, Alfie, who is twelve. The £50,000 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:

a. Alice until Alfie reaches the age of 18 and Alfie thereafter.
b. Alice
c. Alfie.
d. The trustees

Answer 7

c. Alfie.

A special rule applies to bare (or absolute) trusts for minors. Minors with an absolute entitlement to the trust income and capital have unimpaired beneficial ownership of life policies held under trust. In line with the general treatment of trust income for such beneficiaries, the minor beneficiary is liable to income tax on gains arising on the policies held in trust. However, when either or both of the child’s parents are the settlors of the bare trust, they are potentially liable to income tax on gains from a life policy under the
‘settlements’ legislation, which counters the income tax advantages of transferring property or income to minor unmarried children. Income for this purpose includes amounts deemed to be income for tax purposes, such as chargeable event gains.

Question 8

Stuart surrendered his non-qualifying offshore life assurance policy in July 2023 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?

a. £8,000.
b. £4 000
c. £12.000
d. None of it.

Answer 8

b. £4 000

If, however, the policyholder was not resident for part of the period when they owned the policy, they benefit from relief on the gain. This is known as ‘time apportionment relief.
•Relief is given by reducing the chargeable gain by the following fraction:

Number of days policyholder was not resident in the UK/Number of days policy has run

Question 9

If Ed wanted to invest into ISAs, he could invest £20,000:

a. into a stocks and shares ISA, plus the amount of his deceased mother’s ISA in the same lay vear.
b. split between a cash ISA and a stocks and shares ISA in the same tax year.
c. into a cash ISA plus the amount of his deceased mother’s ISA in the same tax year.
d. into a cash ISA, and the same amount into a stock and shares ISA in the same tax
year.

Answer 9

b. split between a cash ISA and a stocks and shares ISA in the same tax year.

If an individual wants to invest in more than one type of ISA in the same tax year, the separate limits for each type of ISA still apply, but the individual cannot invest more than £20,000 in total.

If an ISA holder in a marriage or civil partnership dies, their ISA benefits can be passed on to their spouse or civil partner via an additional ISA allowance. So the deceased rule doesn’t apply to parents only spouses.

Question 10

Jill invested into a non-qualifying UK investment bond when she was a higher-rate taxpayer. She transferred this to Gert, her husband, in
2019. He subsequently encashed it in November 2023 when, including the gain, he was a basic-rate taxpayer. What is the income tax position on the gain?

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

Answer 10

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

The following events are not chargeable events:
• assignments by way of mortgage;
•assignments between spouses or civil partners living together;
• payment of a critical illness benefit;

10g2d/10g2g

Question 11

17. Russell, when aged 60, invested £20,000 in an offshore life assurance bond from which no withdrawals have been made. It was fully surrendered just over five years later in the tax year 2023/2024 for £27,500. Russell’s other taxable income for the tax year, after allowances and deductions, is £50,270, which includes £1,000 of interest. What amount of Income Tax, if any, will Russell have to pay on surrender?

A. None.
B. £250
C. £300
D. £1,500

Answer 11

D. £1,500

Because this is an offshore bond the gain is charged at the full taxable rate instead of sliced, falling in the basic rate due to being in Basic rate £12,571 to £50,270, so gain of £27500-£20000=£7500
20% of this gain is £1500

Question 12

18. Simon, aged 62, with gross annual income of £58,000 in the tax year 2023/2024, is accessing for the first time part of his only pension, which is a personal pension, using an Uncrystallised Fund Pension Lump Sum. He is withdrawing £42,000. What is the total amount of Income Tax, if any, payable as a result of this withdrawal?

A. Nil.
B. £6,300
C. £12,600
D. £16,800

Answer 12

C. £12,600

Funds can be left uncrystallised. Withdrawals can then be taken directly from the fund, with 25% of each withdrawal tax free. The other 75% of each withdrawal is treated as income and is subject to the normal rates of income tax for the year of withdrawal. This is known as an uncrystallised funds pension lump sum (UFPLS).

(£42k x 0.75) to get rid of the tax free amount due to being UFPLS

£31,500 x 0.4 because higher rate earner

= £12,600

Question 13

Barry, with annual income in excess of £800,000, incurred a chargeable capital gain of £160,000.
Soon after he made the following investments into new issues
With respect to his personal tax liability regarding these investments, he can defer the Capital Gains Tax liability on

£60k into VCT
£100k into EIS

A. the whole £160,000 and claim Income Tax relief of £48,000.
B. the whole £160,000 and claim Income Tax relief of £72,000.
C. a maximum of £100,000 and claim Income Tax relief of £48,000.
D. a maximum of £100,000 and claim Income Tax relief of £72,000.

Answer 13

C. a maximum of £100,000 and claim Income Tax relief of £48,000.

Individuals can defer chargeable gains on any assets by reinvesting the gain in shares that qualify under the EIS. This makes the maximum potential tax relief 58% (30% income tax and deferral of a CGT liability of up to 28% (for a residential property gain)).

This only works to defer the gains on the EIS and so a maximum of £100k which was invested

The income tax relief is at 30% so £160k x 0.3 = £48k

Question 14

Maureen is an additional-rate taxpayer who holds 1,200 units in an equity unit trust. Having already received £6,000 of dividends from a private company earlier in the tax year 2023/2024, she now receives 27p per unit as dividend from that unit trust. What is her tax liability, if any, on that unit trust dividend?

A. None.
B. £109.35
C. £127.49
D. £145.80

Answer 14

C. £127.49

• The taxation of dividends from open-ended investment companies (OEICs) and equity unit trusts is the same as the taxation of dividends on shares.
• Income from non-equity unit trusts and OEICs that invest in fixed-interest securities is taxed as savings income and is paid gross.

Basic rate - 8.75%
Higher rate - 33.75%
Additional rate - 39.35%

1200 x £0.27 = £324

£324 x 39.35% = £127.49

Question 15

Helene, aged 16, has been given £25,000 by her mother to invest in ISAs as far as possible in the tax year 2023/2024. Her mother is a basic-rate taxpayer. Helene should be aware that

A. interest over £100 received by her from a cash ISA would result in all of the interest being taxed as her mother’s.
B. she is not permitted to invest in both a junior ISA and a cash ISA.
C. the maximum that she may invest in ISAs of any type, taken as a whole, in the tax year is £20,000.
D. interest over £100 received by her from a junior ISA would result in all of the interest being taxed as her mother’s.

Answer 15

A. interest over £100 received by her from a cash ISA would result in all of the interest being taxed as her mother’s.

• If a parent puts a sum of money into a savings account for their minor unmarried child, the interest is taxed as that parent’s income. For this purpose, a ‘child’ includes an illegitimate or adopted child, or a stepchild.
• The same rule applies to income from any other investments that a parent buys for a child, e.g. shares.

When the child’s income from all investments made by the same parent is not more than £100, the rule is ignored and the income treated as that of the child.

Question 16

Pauline, who has earnings from her employer sufficient to make her a basic-rate taxpayer, has a portfolio of equity unit trusts and fixed interest open-ended investment companies. She should be aware that
A. all income distributions from this portfolio may be offset against her dividend allowance.
B. any realised losses from this portfolio are allowable against realised gains regarding Capital Gains Tax.
C. only realised gains from the unit trusts may be liable to Capital Gains Tax.
D. she may offset realised gains from her portfolio against her dividend allowance if her Capital Gains Tax exemption had been fully utilised.

Answer 16

B. any realised losses from this portfolio are allowable against realised gains regarding Capital Gains Tax.

• Gains on disposal of unit trust units and OEIC shares are liable to CGT and losses are allowable.

• The taxation of dividends from OEICs and equity unit trusts is the same as the taxation of dividends on shares.
• Income from non-equity unit trusts, and OEICs that invest in fixed-interest securities is taxed as savings income and paid gross.

Question 17

21. Brenda receives £600 net per month from her occupational pension scheme. Susan receives £600 net per month from her purchased life annuity. Both are higher-rate taxpayers. Ignoring personal allowances, when comparing the taxation implications of these payments, it can be inferred that

A. Brenda’s gross annuity must be higher than Susan’s.
B. both Brenda’s annuity and Susan’s annuity are fully taxable.
C. higher-rate Income Tax liability, when applicable, will be 33.75% for Susan while 40% for Brenda.
D. only Susan could reduce her Income Tax liability by placing her annuity under trust.

Answer 17

A. Brenda’s gross annuity must be higher than Susan’s.

Purchased life annuities - Partly taxed as savings income and partly tax free.

Purchased annuities certain - Partly taxed as savings income and partly tax free.

Pension annuities - Taxed in full as earned income.

Deferred annuities - Taxed as a purchased life annuity when the annuity is taken.

Annuities for beneficiaries under trusts or wills - Taxed in full as savings income.

As Brenda has a pension annuity which is taxed in full as earned income, this will have a higher gross value than the £600 of the PLA which is only partly taxable and so a lower gross amount

Question 18

Multi choice

Eric invested £100,000 in an offshore assurance bond on 1 October 2018. He has taken regular withdrawals of £5,000 for each of the five policy years. He fully surrendered the bond on 31 August 2023 for £110,000. How is he taxed as a result, assuming that the chargeable gain does NOT alter his tax status and that he has made full use of any personal savings allowance, but no use of his dividend allowance?

A. If he is a basic-rate taxpayer, there will be no further tax to pay.
B. If he is a basic-rate taxpayer, he will be liable to 20% Income Tax on £35,000.
C. If he is a higher-rate taxpayer, he will be liable to 40% Income Tax on £30,000.
D. If he is an additional-rate taxpayer, he will be liable to 45% Income Tax on £35,000.

Answer 18

B. If he is a basic-rate taxpayer, he will be liable to 20% Income Tax on £35,000.

D. If he is an additional-rate taxpayer, he will be liable to 45% Income Tax on £35,000.

He has a 5% allowance as bond to withdraw per year of the initial so 5 years of £5k is £25k

The gain on this policy will then be the £25k withdrawn + the £10k from the gain on the policy. This makes a gain of £35k to be taxed.

As this is an offshore policy it’s taxed at the members full band, so

20% basic
40% higher
45% additional

Making both B and D true

Question 19

Multi choice

Martin is a basic-rate taxpayer, Joyce is a higher-rate taxpayer and Peter is an additional-rate taxpayer. If they have each received a £90 dividend cheque in respect of their shareholdings in the same UK company

A. Joyce will have a 33.75% Income Tax liability on the dividend, assuming she has already used her dividend allowance.
B. any unused personal savings allowance may be used against the dividend by them, if the share is a banking share.
C. they may each have no Income Tax liability through use of the dividend allowance.
D. Peter may have a 39.35% Income Tax liability on that dividend.

Answer 19

A. Joyce will have a 33.75% Income Tax liability on the dividend, assuming she has already used her dividend allowance.
C. they may each have no Income Tax liability through use of the dividend allowance.
D. Peter may have a 39.35% Income Tax liability on that dividend.

Tax rates are;
Basic - 8.75%
Higher rate - 33.75%
Additional rate - 39.35%

Joyce uses her whole £500 allowance so will pay 33.75% on the £90

The personal savings allowance gives the following
Basic rate - £1000
Higher rate - £500
Additional - £0

This cant be used against the dividends received here as these are shares and so would relate to the dividend allowance, the personal savings allowance refers to interests on UTs ITs OEICs banks etc

The dividend allowance will offset this £90, as the dividend allowance is £1000 of tax free dividend returns to anyone

Question 20

Multi choice

Lucinda, an additional rate taxpayer, has just invested £100,000 into a Real Estate Investment Trust (REIT) in the tax year 2023/2024. The taxation consequences for her relating to the investment is such that

A. as much as £30,000 of tax relief could be secured against her tax liability for 2023/2024 and 2022/2023.
B. non-property income distributions received may be offset in part or in whole against her dividend allowance.
C. property income distributions received may be offset in part or in whole against £500 of her personal savings allowance.
D. tax may be due on the non-property income distributions at 39.35%.

Answer 20

B. non-property income distributions received may be offset in part or in whole against her dividend allowance.

D. tax may be due on the non-property income distributions at 39.35%.

REIT are special vehicles used to invest in property, given they are a legitimate REIT who follow the strict rules they have the following

A payment from the tax-exempt element:
• For individual investors, this is classed as property income and paid net of 20% tax.
• Non-taxpayers may reclaim the excess tax deducted.
• ISA investors receive payments gross.

A dividend payment from the non-exempt element:
• This is taxed as any other UK dividend.
• Gains on REIT shares are subject to CGT in the normal way for investors.

Dividend allowance is allowable against these as they are shares so can offset taxable amounts

None property income is subject to the standard dividend tax rates

Tax rates are;
Basic - 8.75%
Higher rate - 33.75%
Additional rate - 39.35%

Question 21

Multi choice

Robin, earning £120,000, has for the first time invested in an Enterprise Investment Scheme, purchasing £100,000 of a new issue. Carol, earning £40,000, has invested £10,000 in her first Venture Capital Trust, also a new issue. When considering their respective tax situations

A. Robin will receive Income Tax relief of £36,000.
B. Carol will receive Income Tax relief at 30% on the whole of her investment.
C. Robin must remain resident in the UK to maintain the full tax benefits.
D. Carol will be exempt from Capital Gains Tax whenever she disposes of her shares.

Answer 21

B. Carol will receive Income Tax relief at 30% on the whole of her

D. Carol will be exempt from Capital Gains Tax whenever she disposes of her shares.

EIS

Income tax relief is given at 30% on qualifying investments of up to £1m in a tax year

The relief is given by deducting it from the investor’s tax liability.

For example, if an individual has an income tax liability of £10,000 on total income and invests £20,000 into EIS shares, the tax relief of £6,000 (30% of £20,000) is deducted from the tax liability, leaving £4,000 to pay.

Disposals of qualifying shares at a profit are usually exempt from CGT as long as the shares have been held for three years.

VCT

Individuals who are aged at least 18 can obtain income tax relief at 30% on investments of up to £200,000 per tax year in newly issued ordinary shares in VCTs. This is deducted in the same method as EIS through tax relief.

Individuals are also exempt from CGT when they dispose of VCT shares. The shares do not have to be held for any minimum period.

Question 22

Multi choice

Esther is trying to understand some central Capital Gains Taxation features that apply to any gains she makes on her FTSE 100 shares. She should be aware that

A. gifts of shares, without reservation, to her children are not disposals for Capital Gains Tax purposes.
B. the annual Capital Gains Tax exemption, if not fully used, may be carried forward one year.
C. two different Capital Gains Tax rates may be applied to her realised gains in the same year.
D. when shares are transferred to discretionary trusts, any Capital Gains Tax liabilities may be held over.

Answer 22

C. two different Capital Gains Tax rates may be applied to her realised gains in the same year.

D. when shares are transferred to discretionary trusts, any Capital Gains Tax liabilities may be held over.

A capital gain is calculated in the same way for a trust as for an individual.

• If trustees sell or transfer a chargeable asset, the gain is usually the difference between the proceeds of a sale of assets and their cost or value when acquired by the trust.

• The tax due on trust gains is now 20%, subject to any available annual exempt amount, unless the asset in question is residential property that is not the principal private residence (PPR) of a beneficiary, in which case the rate is 28%.

• If a trust transfers assets to a beneficiary, assuming the trust deed allows the trustees to do so, the market value on transfer is treated as the disposal proceeds for calculating the gain made by the trustees - subject to any claim for holdover relief.

Question 23

Multi choice

Nora is an additional-rate taxpayer. She is wondering whether to invest in some onshore or offshore life assurance bonds. With regard to her personal tax position relating to these bonds, she should be aware that

A. a personal Income Tax liability may arise on surrender of 25% for the onshore and 45% for the offshore bond with regard to any realised gains.
B. where the 5% tax deferral rule applies, the 5% refers to the value of the bond when the withdrawal is made.
C. while an additional-rate taxpayer, top slicing does not help to reduce any Income Tax liability regarding either of the bonds.
D. withdrawals of up to 5% per annum with tax deferred are available only on onshore bonds.

Answer 23

A. a personal Income Tax liability may arise on surrender of 25% for the onshore and 45% for the offshore bond with regard to any realised gains.

C. while an additional-rate taxpayer, top slicing does not help to reduce any Income Tax liability regarding either of the bonds.

Onshore bonds have basic rate tax paid in the investment so all surrenders are paid gross basic rate meaning an additional rate tax payer would pay 25% on onshore bonds

Where as offshore bonds will just pay tax at their rate meaning an additional tax payer pays 45% on the whole thing

Top slicing relief doesn’t reduce income below £100,000, as Nora is an additional rate tax payer she is earning over £125,140 and so neither bond can benefit from top slicing

Question 24

Multi choice

Keith, a higher-rate taxpayer, is investing in commercial property to generate an income. His financial adviser has recommended that he considers Real Estate Investment Trusts (REITs), so he should be made aware that

A. they are the highest yielding of all property sector investment vehicles.
B. they may be held within stocks and shares ISAs.
C. realised gains on REITs may be subject to Capital Gains Tax.
D. they are structured as closed-end companies.

Answer 24

B. they may be held within stocks and shares ISAs.

C. realised gains on REITs may be subject to Capital Gains Tax.

D. they are structured as closed-end companies.

They can be held in an ISA as they are listed closed-ended companies tradable on recognised stock exchanges

Realised gains on a REIT is taxed in the normal way for investors

Question 25

Multi choice

George and Charles are civil partners and are UK domiciled. Charles is about to move abroad for two years and they are both considering Inheritance Tax (IHT) implications relating to transfers between them. They should be made aware that

A. transfers between them may be exempt both during life and on death.
B. if their civil partnership breaks down, any transfers made between them prior to the final order of dissolution would be exempt from IHT.
C. while Charles is abroad, certain transfers to Charles may have a 20% IHT liability.
D. while Charles is abroad, any gifts received from George in excess of £325,000 would be potentially exempt transfers.

Answer 25

A. transfers between them may be exempt both during life and on death.

B. if their civil partnership breaks down, any transfers made between them prior to the final order of dissolution would be exempt from IHT.

Interspouseal transfers are exempt from any IHT liability in life and death

There is usually no IHT on transfers when a marriage or civil partnership breaks down, as long as they take place before the decree absolute. Even after this event, it may be possible to argue that there is no gratuitous intent.

Question 26

Multi choice

Emma and Aimee are 15-year-old twins. Their mother opened Child Trust Fund (CTF) accounts for them when they were 1 year old. She is wanting to invest further on a tax-efficient basis for them, in their own names. She should be aware that

A. the CTFs may be retained, while investments are made into junior ISAs for them.
B. the CTFs may be transferred into junior ISAs with contributions then being made to the junior ISAs only.
C. If Junior ISAs are opened for both children, the maximum £9,000 contribution must be divided equally between them.
D. payments into pension plans are allowable for the twins with tax relief.

Answer 26

B. the CTFs may be transferred into junior ISAs with contributions then being made to the junior ISAs only.

D. payments into pension plans are allowable for the twins with tax relief.

CTF accounts can be moved between providers and savings kept in a CTF can be transferred to a Junior ISA.

There is no minimum age for a pension and anyone in a pension will receive the benefits

Question 27

Multi choice

Ethel has died and left all her estate, valued at £1,200,000, to her two children. Which of the following gifts made during her lifetime could be included in her estate for Inheritance Tax purposes?

A. Her main residence until her death, the ownership of which was transferred to her children eight years ago.
B. Her £425,000 gift made to her UK-domiciled husband earlier in the tax year of her death.
C. A gift to her son of £12,000, made just over three years prior to her death.
D. Part of the £350,000 gift made to a UK-registered charity in the tax year of her death.

Answer 27

A. Her main residence until her death, the ownership of which was transferred to her children eight years ago.

C. A gift to her son of £12,000, made just over three years prior to her death.

The availability of the RNRB is protected if an individual has downsized or ceased to own their home after 7 July 2015, but only if assets of an equivalent value are passed to direct descendants - so this should be written into a will.

The gift to the son is within 3 years and so will count towards the NRB

Question 28

Multi choice

Delia, an additional-rate taxpayer, is interested in saving for her retirement and is considering pensions and ISAs. She should be aware that

A. income withdrawals from ISAs do not generate any Income Tax liabilities.
B. capital gains realised within pension funds and ISAs are subject to Capital Gains Tax at the reduced rate of 10%.
C. pension funds have a tax liability regarding dividends received from AIM shares.
D. she may receive basic-rate tax relief at source regarding pension contributions, but not ISA contributions.

Answer 28

A. income withdrawals from ISAs do not generate any Income Tax liabilities.

D. she may receive basic-rate tax relief at source regarding pension contributions, but not ISA contributions.

ISAs pay withdrawals free of income tax that is the main perk of the vehicle

Pension contributions are tax free up to £60k, while ISA contributions are not free of income tax

Question 29

Frankie won a premium bond prize of £10,000 and has received dividends of £50,000 from both an Enterprise Investment Scheme (EIS) and a Venture Capital Trust
(VCT). What is his tax position?

A Only the EIS dividend is taxable
B The dividends from both the EIS and VCT investments are taxable
C Only the CT dividend is taxable
D Both the VCT dividend and the premium bond prize are taxable

Answer 29

A Only the EIS dividend is taxable

Both ElS and VCTs offer tax-free growth, which means if you decide to sell your shares and you make a profit, the proceeds won’t be liable for capital gains tax (CGT). For most investors this is a saving of 20% based on current rates, and where an EIS company achieves significant growth, this can be incredibly valuable. As mentioned above though, VCTs don’t typically hold on to growth and any gains in the portfolio are usually distributed to shareholders as dividends, which are tax free. EIS companies rarely pay dividends (because they need all their capital to grow), but if they do these are not tax free.

Premium bond prizes are all tax free

Question 30

Paul and Sarah, both age 38, are married with two children aged 15 and 17. What is the total amount they can pay into ISAs in the current tax year?

Answer 30

Paul and Sarah can invest £20,000 each for themselves into ISAs. They can also invest £20,000 into a cash ISA for their eldest child. This is in addition to the £9,000 they can place into a Junior ISA for each of their children. The total amount is therefore £20,000 + £20,000 + £20,000 + £9,000 - £9,000 = £78,000. - Chapter 10, Section D1C, Learning Outcome 2.2

Question 31

Paul has recently taken out an investment bond and wants to know if he will be subject to Income Tax on any gain that is made. What are the possible chargeable events on the policy

Answer 31

Both surrender and assignment for moneys worth are chargeable events under non-qualifying policies.
Assignment between spouses or civil partners and payment of a critical illness benefit are not. - Chapter 10, Section
G2C/D, Learning Outcome 2.2

These may not be the only correct answers to this question, it’s taken half heartedly from an exam that I couldn’t find the whole question from

Question 32

Joseph has been asked to be a trustee of a trust where there is no interest in possession. He has asked you what the implications of this are. You can tell him that: (Tick all that apply.)

A. these trusts are usually known as bare trusts.
B. there is no requirement for him to pay income to any particular beneficiary-
C. a transfer into this type of trust is a potentially exempt transfer.
D. if a beneficiary dies, there is no charge to IHT on their estate.
E. the death of a beneficiary would trigger a potential IHT charge.

Answer 32

B. there is no requirement for him to pay income to any particular beneficiary.
D. if a beneficiary dies, there is no charge to IHT on their estate

Where no one has an interest in possession there is no requirement for trust income to be paid to any particular beneficiary. If a beneficiary such a trust dies, there is no charge to IHT on their estate because they do not have an interest in possession and are therefore not deemed to own the underlying capital. - Chapter 4, Sections H5/H5A,
Learning Outcome 3.1

Question 33

Why might an offshore fund with reporting status be preferable for a UK investor than one without?

Answer 33

A. Any gains on disposal are subject to normal CGT rules and taxed at 10% or 20%.

Gains on the disposal of an offshore reporting fund are subject to CGT and taxed at 10% or 20% rather than being subject to Income Tax at 20%, 40% or 45% if it were a non-reporting fund. The income is taxed whether it is paid out or not. - Chapter 10, Section F1, Learning Outcome 2.2

Question 34

Geraldine, who earns £47,500, makes a chargeable gain on an onshore bond that she has held for just over 5 years of £25,000. How much top slicing relief will Geraldine receive?

Answer 34

£2616

Geraldine’s earnings use up the £12,570 personal allowance and £34,930 of the basic rate tax band.

Tax due on the gain is therefore £500 @ 0% (personal savings allowance),

plus £2,270 (the remaining basic rate tax band) @ 20% = £454, plus £22,230 @ 40% = £8,892.

Total tax on gain = £9,346. From this we deduct the 20% deemed taken at source from the gain.

£9,346 - £5,000 (£25,000 @ 20%) = £4,346.

The annual equivalent is £25,000/5 = £5,000.

Tax on the annual equivalent is £500 @ 0% plus £2,270 (the remaining basic rate tax band) @ 20% plus £2,230 @ 40% = £1,346.

From this we deduct the 20% deemed taken at source from the gain. £1,346 - £1,000 (£5,000 @ 20%) = £346.

Multiply back up by 5 = £1,730 to give the relieved liability.

Top slicing relief is therefore £4,346 - £1,730 = £2,616.

• Chapter 10, Section G2G,
  Learning Outcome 2.2

Question 35

Jen owns a VAT-registered business that has a total turnover of £90,000 (inclusive of 20% VAT). She claims input VAT of £8,000 annually. She could join the flat-rate scheme, in which case she would pay a flat-rate percentage of 11%. What is the least amount of VAT that Jen could pay in the current tax year?

Answer 35

£7000

Under normal rules, Jen would pay £90,000 x 20/120 = £15,000 - £8,000 = £7,000. Under the flat-rate scheme she would pay £90,000 × 11% = £9,900. It is therefore not beneficial for Jen to join the flat-rate scheme and the least amount of VAT she can pay is £7,000 under the normal rules. - Chapter 8, Section ABC, Learning Outcome 1.8

Question 36

How do CTF’s work

Answer 36

• invest up to £9000 per year
• can be opened at birth, can’t touch funds until 18
• can be transferred to a JISA only
• maturing CTFs can be transferred to any type of ISA at age 18

Question 37

What is a single premium life assurance policy

Answer 37

A single premium life assurance policy is non-qualifying. 5% withdrawals are tax deferred, rather than tax free.
His PSA can be used to reduce tax due on encashment and if adviser charges are taken from the policy, they will count towards the 5% allowance. - Chapter 10, Section G2, Learning Outcome 2.2

Question 38

Describe a SEIS

Answer 38

The SEIS involves much smaller, start-up businesses and so, it is higher risk than the ElS.
The maximum annual contribution is £200,000 but to reflect the riskier nature of the investment, income tax relief at 50% is available.
Investors making chargeable gains in 2023/24 will be exempt from CGT on 50% of gains that are reinvested in SEIS companies in 2023/24.

Requirements

The company must be carrying on a genuine new trade, have gross assets of not more than £350,000 and have fewer than 25 full-time employees. However, it must have been trading for less than 3 years, rather than for less 2 years.
- Chapter 10, Section K6, Learning Outcome 2.2

Question 39

Sally and James are married with one child aged 17. What is the total amount they can pay into ISAs as a family in the current examinable tax year?

Answer 39

Answer

£69,000

Detailed explanation

Sally and James can each invest £20,000. They can also invest in a Junior ISA for their child - £9,000 in the current examinable tax year. Their child can also invest £20,000 into a cash ISA because they are over 16.

The answer is therefore £20,000 x 3 = £60,000 + £9,000 = £69,000

CIl R03 Study Text Chapter 10, Section D1C

Question 40

For 2023/24, what is the maximum amount that can be contributed to a pension scheme for a member and what contributions count towards this limit?

Answer 40

The annual allowance is £60,000 for tax year 2023/24 or the amount of the individual’s relevant UK earnings, if less. Contributions by the employer and employee count towards this limit.

Question 41

What rates of tax are payable on savings income?

Answer 41

0%, 20%, 40% £ 45%

Question 42

If John, aged 40, invests £4,000 into a cash ISA on 24 April 2023 and does not have a stocks and shares ISA, how much more can be invested into that cash ISA in tax year 2023/24?

Answer 42

£16,000

Question 43

When does the chargeable event gain arise where regular part surrenders are being taken at 6% a year?

Answer 43

On the last day of each policy year

Question 44

Are UK investors liable to income tax on gains on offshore life policies?

Answer 44

Yes

Question 45

When will the settlor be treated as the person chargeable as regards a life assurance policy held in trust?

Answer 45

When the settlor is both alive (or the chargeable event occurred in the tax year of

their death) and UK tax resident immediately before the chargeable event.

Question 46

Isabella placed £400,000 into a discretionary trust three years ago. What rate of IHT will be payable if she now takes out a life policy under a new interest in possession trust?

Answer 46

20%

Question 47

What rate of interest applies to POAT

(Pre-owned assets tax)

Answer 47

The official rate, which is 2.25% for the tax year 2023/24.

Question 48

What is the maximum investment into a VCT eligible for income tax relief

Answer 48

£200,000 per tax year