CII R05 Taxation of Protection Products 2

Question 1

Under a group income protection scheme, how are the benefit payments taxed when received by the employee?

Accepted Answer

They are taxed as employment income under PAYE and are subject to both income tax and employee National Insurance contributions

Answer

They are completely tax-free as they come from an employer scheme

Answer

They are subject to capital gains tax only

Answer

They are taxed at a flat rate of 20% regardless of the employee's tax band

Question 2

A policyholder has a non-qualifying life assurance policy that generates a chargeable event gain. How is this gain taxed?

Accepted Answer

The gain is added to the policyholder's income for the year and taxed at their marginal rate, with credit given for basic rate tax already deemed paid within the policy

Answer

It is always tax-free

Answer

The gain is subject to capital gains tax at 20%

Answer

The gain is taxed at a flat rate of 45%

Question 3

For inheritance tax purposes, what is the effect of placing a life assurance policy in a bare trust?

Accepted Answer

The policy is treated as a gift to the beneficiary — proceeds are outside the estate but the initial gift into trust may be a potentially exempt transfer (PET)

Answer

The policy proceeds are automatically exempt from all taxes

Answer

The trust attracts an immediate 20% entry charge

Answer

The policy must be surrendered and a new one taken out in the beneficiary's name

Question 4

What is 'top slicing relief' and when does it apply?

Accepted Answer

It is a method of calculating the tax on a chargeable event gain by dividing it by the number of complete years the policy has been held, to determine the appropriate tax rate

Answer

It is a relief that exempts the first £10,000 of any insurance policy gain from tax

Answer

It is a relief that allows policyholders to slice their premiums into monthly payments

Answer

It only applies to critical illness policies

Question 5

An employer pays income protection premiums for an employee under a group scheme. Are these premiums a taxable benefit in kind for the employee?

Accepted Answer

No, the premiums are not normally treated as a benefit in kind for the employee, but the benefits when received are taxed as employment income

Answer

Yes, the full premium is always taxable as a benefit in kind

Answer

The premiums are taxable but only if they exceed £500 per year

Answer

The premiums are tax-free for both the employer and the employee permanently

Question 6

A discretionary trust is commonly used with life assurance policies. For inheritance tax purposes, what is a key feature of property held in a discretionary trust?

Accepted Answer

It is subject to periodic charges (every 10 years) and exit charges, with a maximum rate of 6% of the value above the nil-rate band

Answer

It is always completely exempt from inheritance tax

Answer

It is taxed at 40% on every anniversary of the trust

Answer

Discretionary trusts cannot hold life assurance policies