CII R05 Taxation of Protection Products

Question 1

How are the proceeds of a qualifying life assurance policy taxed when paid as a death benefit to the policyholder's estate?

Accepted Answer

The proceeds are generally free of income tax and capital gains tax, though they may be subject to inheritance tax if not written in trust

Answer

The proceeds are subject to income tax at the policyholder's marginal rate

Answer

The proceeds are subject to 40% capital gains tax

Answer

The proceeds are always completely tax-free regardless of whether the policy is in trust

Question 2

Income protection benefit payments received by an individual policyholder are treated for tax purposes as:

Accepted Answer

Taxable income subject to income tax under PAYE but not National Insurance contributions

Answer

Tax-free capital payments

Answer

Earned income subject to income tax and National Insurance contributions

Answer

Tax-free if the deferred period is longer than 26 weeks

Question 3

Are premiums paid for an individual term assurance policy tax-deductible for the policyholder?

Accepted Answer

No, premiums for individual protection policies are generally paid from taxed income with no tax relief

Answer

Yes, they are fully deductible against income tax

Answer

Yes, but only if the policyholder is a higher-rate taxpayer

Answer

Yes, they qualify for relief at 20% under the life assurance premium relief scheme

Question 4

An employer pays the premiums for a group life assurance scheme (death in service). How are the premiums treated for tax purposes?

Accepted Answer

The premiums are an allowable business expense for the employer and are not treated as a benefit in kind for the employee (subject to HMRC approval)

Answer

The premiums are a taxable benefit in kind for the employee

Answer

The premiums must be paid from the employee's net salary

Answer

The premiums attract capital gains tax for the employer

Question 5

Critical illness benefit payments received under a personal policy are generally treated as:

Accepted Answer

Tax-free lump sum payments, as they are treated as capital sums from a qualifying policy

Answer

Taxable income at the policyholder's marginal rate

Answer

Subject to capital gains tax at 20%

Answer

Taxable at a flat rate of 10%

Question 6

How is a relevant life policy taxed in relation to the employer's premium payments and the benefit paid on death?

Accepted Answer

Premiums are an allowable business expense for the employer, not a benefit in kind for the employee, and the death benefit is paid free of inheritance tax via a discretionary trust

Answer

Premiums are not tax-deductible and the benefit is subject to inheritance tax

Answer

Premiums attract VAT and the benefit is subject to income tax

Answer

Premiums are paid by the employee from net salary and the benefit is tax-free