CII R05 Business Protection 3

Question 1

A binding buy and sell agreement for partnership protection may cause a problem because:

Accepted Answer

HMRC may deny Business Property Relief on the deceased partner's share because there is a binding contract for its sale

Answer

The insurer can refuse to pay if a cross-option agreement is not also in place

Answer

The surviving partners are not legally obliged to complete the purchase within 12 months

Answer

The policy proceeds are automatically subject to income tax in the hands of the surviving partners

Question 2

A discretionary trust used to hold business protection proceeds provides flexibility because:

Accepted Answer

The trustees can distribute proceeds to whichever beneficiaries are most appropriate at the time of a claim

Answer

It guarantees the proceeds will be tax-free regardless of how they are distributed

Answer

It removes the need for the business to arrange legal documentation

Answer

It ensures the proceeds automatically pass to the surviving shareholders within 30 days

Question 3

Which of the following is TRUE about a 'life of another' policy arrangement used in business protection?

Accepted Answer

Proceeds are paid directly to the policy owner, bypassing the deceased's estate

Answer

The policy is always subject to an immediate IHT charge as a chargeable lifetime transfer

Answer

The policy owner must be a registered business rather than an individual

Answer

Medical underwriting is not required for life of another policies

Question 4

When assessing whether key person insurance premiums are deductible, HMRC applies which of the following criteria?

Accepted Answer

The insurance is on an employee's life, serves a trading purpose, and is annual or short-term

Answer

The policy must have a term of at least 10 years to qualify as revenue expenditure

Answer

The key person must be a higher or additional rate taxpayer

Answer

The business must have been trading for at least three years before taking out the policy

Question 5

What is 'death-in-service' benefit in the context of business protection?

Accepted Answer

A tax-free lump sum, typically a multiple of salary, paid to an employee's nominated dependants if they die while employed

Answer

A lump sum paid to the business to cover the cost of recruiting and training a replacement employee

Answer

A continuing income paid to the surviving spouse until they reach state pension age

Answer

A one-off payment made to the business's pension scheme to cover the deceased employee's contributions

Question 6

For a shareholder protection arrangement to work effectively at the point of claim, which document is essential alongside the life assurance policy?

Accepted Answer

A share sale agreement or cross-option agreement setting out the mechanism for transferring shares

Answer

A certified copy of the company's memorandum of association

Answer

Written consent from the company's bank or lender

Answer

A letter of wishes from each shareholder filed with the insurer

Question 7

A company pays premiums on a relevant life policy for a director-employee. How are these premiums treated for the director's personal income tax?

Accepted Answer

They are not treated as a taxable benefit in kind, so the director has no personal income tax liability on the premiums

Answer

They are treated as a taxable benefit in kind and reported on the director's P11D

Answer

They are treated as additional salary and subject to PAYE income tax and national insurance

Answer

They are deductible against the director's self-assessment tax bill as a personal pension contribution