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

Under a group income protection scheme, benefit payments received by the employee are treated as employment income. They are taxed under PAYE and are subject to both income tax and employee National Insurance contributions. This differs from individual income protection benefits, which are subject to income tax but not NICs.

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

A chargeable event gain on a non-qualifying policy is treated as the policyholder's income in the year the chargeable event occurs. Basic rate tax is deemed to have been paid within the fund, so only higher-rate and additional-rate taxpayers face an additional liability. Top slicing relief may be available to mitigate the impact of a large gain pushing income into a higher tax band.

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

Placing a life policy in a bare trust means the policy is held for the absolute benefit of a named beneficiary. The proceeds are paid outside the policyholder's estate, avoiding IHT on the death benefit. However, the act of placing the policy in trust is a transfer of value and may constitute a potentially exempt transfer (PET), which becomes chargeable if the donor dies within seven years.

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

Top slicing relief prevents a large one-off chargeable event gain from being unfairly taxed at a higher rate than would apply if the gain had been spread over the life of the policy. The gain is divided by the number of complete policy years to find the 'annual equivalent'. This annual equivalent is added to the policyholder's income to determine the marginal rate, which is then applied to the full gain.

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

Employer-paid group income protection premiums are not treated as a taxable benefit in kind for the employee. The employer can deduct the premiums as a business expense. However, when a claim is made and the employee receives benefit payments, those payments are taxed as employment income under PAYE with NICs. This creates a trade-off: tax-free premiums but taxable benefits.

CII R05 Practice Test

CII R05 Practice Test

CII R05 Taxation of Protection Products 2