CISI IAD Investment Risk and Taxation — Questions and Answers
Question 1: For the 2025/26 tax year, what is the annual ISA subscription limit for an adult in the UK?
- £15,000
- £20,000 (Correct answer)
- £25,000
- £40,000
Correct answer: £20,000
The annual ISA allowance for adults in the UK is £20,000 for the 2025/26 tax year. This can be split across different ISA types (Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, and Lifetime ISA) but the total across all ISAs cannot exceed £20,000 in a single tax year. Gains and income within an ISA wrapper are free from capital gains tax and income tax.
Question 2: What is the current annual exempt amount for Capital Gains Tax (CGT) for individuals in the UK for 2025/26?
- £12,300
- £6,000
- £3,000 (Correct answer)
- £1,000
Correct answer: £3,000
The CGT annual exempt amount for individuals was reduced from £12,300 (2022/23) to £6,000 (2023/24) and then further to £3,000 from 2024/25 onwards. This significant reduction means more investors will have CGT liabilities, making tax-efficient wrappers like ISAs and pensions even more important in financial planning.
Question 3: Which of the following best describes 'systematic risk'?
- Risk specific to a single company that can be eliminated through diversification
- Market-wide risk that affects all securities and cannot be diversified away (Correct answer)
- The risk of a broker failing to settle a trade
- Operational risk within an investment management firm
Correct answer: Market-wide risk that affects all securities and cannot be diversified away
Systematic risk (also called market risk or non-diversifiable risk) affects the entire market and cannot be eliminated through portfolio diversification. Examples include interest rate changes, inflation, recession, political events, and global pandemics. It is measured by beta in the Capital Asset Pricing Model (CAPM). Unsystematic (specific) risk, by contrast, can be reduced through diversification.
Question 4: A client sells shares for a gain of £15,000 in the 2025/26 tax year. After using their CGT annual exempt amount of £3,000, at what rate would a higher-rate taxpayer pay CGT on the remaining gain?
- 10%
- 18%
- 20% (Correct answer)
- 24%
Correct answer: 20%
For the 2025/26 tax year, CGT on listed shares and securities is charged at 18% for basic-rate taxpayers and 24% for higher/additional-rate taxpayers (following the Autumn Budget 2024 increases). The taxable gain would be £15,000 minus £3,000 annual exempt amount = £12,000, taxed at 24% for a higher-rate taxpayer, resulting in CGT of £2,880.
Question 5: What is 'pound cost averaging' and when is it most beneficial?
- Investing a lump sum at the lowest point in the market cycle
- Investing regular fixed amounts to smooth out the average purchase price over time, particularly beneficial in volatile markets (Correct answer)
- Converting foreign currency investments back to sterling at regular intervals
- Rebalancing a portfolio to maintain equal pound weightings
Correct answer: Investing regular fixed amounts to smooth out the average purchase price over time, particularly beneficial in volatile markets
Pound cost averaging involves investing a fixed amount at regular intervals regardless of the asset price. When prices are low, more units are purchased; when prices are high, fewer units are bought. Over time, this tends to produce a lower average cost per unit than buying at random prices. It is particularly useful in volatile markets and removes the need to time the market, making it suitable for regular savings plans.
Question 6: Which of the following investments is exempt from UK Income Tax?
- Dividends from UK equities held directly
- Interest from a Corporate Bond held outside an ISA
- Returns from a qualifying Venture Capital Trust (VCT) (Correct answer)
- Rental income from a buy-to-let property
Correct answer: Returns from a qualifying Venture Capital Trust (VCT)
Dividends from qualifying VCTs are exempt from income tax, provided the VCT shares were acquired within the annual investment limit (£200,000). VCTs also offer 30% income tax relief on the amount subscribed (subject to conditions) and CGT exemption on disposal. These generous tax reliefs are provided because VCTs invest in higher-risk small companies, and the government incentivises this capital allocation.
CISI IAD Investment Risk and Taxation
For the 2025/26 tax year, what is the annual ISA subscription limit for an adult in the UK?