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

Qualifying life policy proceeds are generally free of income tax and capital gains tax. However, if the proceeds form part of the deceased's estate, they may be subject to inheritance tax at 40% on the value above the nil-rate band. Writing the policy in trust removes the proceeds from the estate and avoids IHT.

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

Individual income protection benefits paid under a personally-owned policy are subject to income tax under PAYE but are NOT subject to National Insurance contributions. This is because the benefit is treated as income replacement rather than earnings from employment. The premiums for individual policies are not tax-deductible.

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

Premiums for individual protection policies (term assurance, critical illness, income protection) are paid from taxed income and do not qualify for income tax relief. Life Assurance Premium Relief (LAPR) was abolished for new policies from 14 March 1984, so only policies taken out before that date may still benefit from this relief.

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

Premiums paid by the employer for a registered group life assurance scheme are an allowable deduction against corporation tax as a business expense. Provided the scheme is set up under an excepted group life policy or registered arrangement, the premiums are not treated as a benefit in kind for the employee and do not generate an income tax charge on the employee.

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

Critical illness benefit payments under a personal policy are generally tax-free lump sums. They are treated as capital payments from a qualifying (or non-qualifying but still exempt) life policy. The payment is made on the occurrence of a specified event (diagnosis of a critical illness) and is not subject to income tax or capital gains tax.

CII R05 Practice Test

CII R05 Practice Test

CII R05 Taxation of Protection Products