CISI IAD Investment Risk and Taxation

Question 1

For the 2025/26 tax year, what is the annual ISA subscription limit for an adult in the UK?

Accepted Answer

£20,000

Answer

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?

Accepted Answer

£3,000

Answer

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'?

Accepted Answer

Market-wide risk that affects all securities and cannot be diversified away

Answer

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?

Accepted Answer

20%

Answer

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?

Accepted Answer

Investing regular fixed amounts to smooth out the average purchase price over time, particularly beneficial in volatile markets

Answer

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.

CISI Investment Advice Practice Test

CISI Investment Advice Practice Test

CISI IAD Investment Risk and Taxation