CII R05 UK Tax Treatment of Protection Policies 2 — Questions and Answers
Question 1: How is a death-in-service lump sum benefit (under a registered group life scheme) treated for inheritance tax purposes?
- It forms part of the deceased's estate and is subject to IHT
- It is written in trust so it falls outside the estate and is free of IHT (Correct answer)
- It is automatically exempt up to £325,000 then taxed at 40%
- It is subject to IHT only if the employer contributes to the premium
Correct answer: It is written in trust so it falls outside the estate and is free of IHT
Group life schemes registered under the Finance Act 2004 are held in discretionary trust by trustees. Payments are therefore made outside the deceased's estate and are not subject to inheritance tax.
Question 2: A self-employed individual pays income protection premiums. Can they claim tax relief on these premiums?
- Yes, as a business expense against trading profits
- No, personal income protection premiums are not tax deductible for self-employed individuals (Correct answer)
- Yes, at the basic rate of income tax
- Yes, but only up to the annual ISA allowance equivalent
Correct answer: No, personal income protection premiums are not tax deductible for self-employed individuals
Personal income protection insurance premiums are not tax deductible for self-employed individuals. They are treated as a personal, non-business expense regardless of employment status.
Question 3: What is the inheritance tax position of a life assurance policy written in trust?
- It falls into the estate and may be subject to IHT
- It falls outside the estate and is not subject to IHT (Correct answer)
- It is subject to a flat 20% IHT charge
- It is exempt only if the trust is created more than seven years before death
Correct answer: It falls outside the estate and is not subject to IHT
A life assurance policy written in trust means the benefit is owned by the trust, not the policyholder. On death, the proceeds go directly to the beneficiaries without passing through the estate, so they are outside the scope of IHT.
Question 4: Which of the following statements about P11D benefits relating to protection policies is correct?
- Employer-paid group life assurance premiums are a P11D benefit in kind
- Employer-paid group income protection premiums are a P11D benefit in kind
- Employer-paid group private medical insurance premiums are a P11D benefit in kind (Correct answer)
- Employer-paid group critical illness premiums are never a P11D benefit
Correct answer: Employer-paid group private medical insurance premiums are a P11D benefit in kind
Employer-paid group private medical insurance (PMI) premiums are a taxable benefit in kind, reported on a P11D form. Group life and group income protection are not treated as benefits in kind for employees.
Question 5: If a life assurance policy is not written in trust and the policyholder dies, what happens to the proceeds?
- They pass directly to the named beneficiary free of tax
- They form part of the deceased's estate and may be subject to inheritance tax (Correct answer)
- They are paid to the insurer's charity fund
- They are split equally between spouse and children automatically
Correct answer: They form part of the deceased's estate and may be subject to inheritance tax
If a life policy is not written in trust, the proceeds form part of the policyholder's estate on death. If the total estate exceeds the nil-rate band (currently £325,000), the excess is subject to inheritance tax at 40%.
Question 6: A sole trader takes out a 'relevant life policy' for themselves. What is the correct tax treatment?
- A sole trader can take out a relevant life policy and gain corporation tax relief
- Sole traders cannot use relevant life policies — these are only available through limited companies and partnerships (Correct answer)
- The premiums qualify for income tax relief at the sole trader's marginal rate
- The premiums are paid gross with tax relief claimed via self-assessment
Correct answer: Sole traders cannot use relevant life policies — these are only available through limited companies and partnerships
Relevant life policies are only available to employees, including directors of limited companies. Sole traders are not employees of their own business and therefore cannot take out a relevant life policy.
CII R05 UK Tax Treatment of Protection Policies 2
How is a death-in-service lump sum benefit (under a registered group life scheme) treated for inheritance tax purposes?