CISI IoI Taxation of Investments 2 — Questions and Answers
Question 1: What is 'bed and ISA' in the context of tax planning?
- Selling an investment and immediately repurchasing it within an ISA to shelter future returns from tax (Correct answer)
- A type of ISA that can only hold property investments
- A scheme to avoid paying income tax on ISA withdrawals
- A government programme providing housing benefits to ISA holders
Correct answer: Selling an investment and immediately repurchasing it within an ISA to shelter future returns from tax
Bed and ISA involves selling an investment held outside an ISA and immediately repurchasing the same investment within an ISA wrapper. This crystallises any capital gain (potentially using the CGT annual exemption) and shelters all future income and gains on that investment from tax within the ISA.
Question 2: How are gains on UK government gilts treated for Capital Gains Tax purposes?
- They are taxed at standard CGT rates
- They are exempt from Capital Gains Tax (Correct answer)
- They are taxed at a special reduced rate of 5%
- They are only taxable if held for less than one year
Correct answer: They are exempt from Capital Gains Tax
Capital gains on UK government gilts (and most qualifying corporate bonds) are exempt from CGT. This is a significant tax advantage. However, the coupon (interest) payments on gilts are subject to Income Tax, although they are paid gross (without tax deducted at source).
Question 3: What is the pension annual allowance for the 2025/26 tax year?
- GBP 40,000
- GBP 60,000 (Correct answer)
- GBP 80,000
- GBP 20,000
Correct answer: GBP 60,000
The pension annual allowance was increased to GBP 60,000 from the 2023/24 tax year onwards (up from GBP 40,000). This is the maximum amount of pension contributions that can receive tax relief in a single tax year. The allowance may be reduced for high earners through the tapered annual allowance.
Question 4: A basic rate taxpayer makes a personal pension contribution of GBP 8,000 (net). What is the gross contribution including basic rate tax relief?
- GBP 8,000
- GBP 9,600
- GBP 10,000 (Correct answer)
- GBP 11,200
Correct answer: GBP 10,000
Pension contributions receive tax relief at source. A net contribution of GBP 8,000 is treated as having had 20% basic rate tax deducted. To find the gross amount: GBP 8,000 / 0.80 = GBP 10,000. The pension provider claims back GBP 2,000 from HMRC, so GBP 10,000 is invested in the pension.
Question 5: What is the stamp duty rate on purchases of UK shares traded on the London Stock Exchange?
- 0.5% of the purchase consideration (Correct answer)
- 1% of the purchase consideration
- 0.25% of the purchase consideration
- There is no stamp duty on share purchases
Correct answer: 0.5% of the purchase consideration
Stamp Duty Reserve Tax (SDRT) is charged at 0.5% on purchases of UK shares settled through CREST. It is rounded up to the nearest penny and is payable by the buyer. There is no stamp duty on sales of shares, and certain transactions (such as transfers into ISAs or between spouses) are exempt.
Question 6: Which of the following statements about the taxation of unit trusts is correct?
- Unit trusts are exempt from all taxes at the fund level and investor level
- The fund itself is exempt from CGT on its investments, but investors may be liable for CGT when they sell their units (Correct answer)
- Investors in unit trusts never pay any tax on distributions
- Unit trusts pay Corporation Tax on all capital gains within the fund
Correct answer: The fund itself is exempt from CGT on its investments, but investors may be liable for CGT when they sell their units
Authorised unit trusts (and OEICs) are exempt from CGT on gains made within the fund on their portfolio transactions. However, when an investor sells (redeems) their units at a profit, they may be liable for CGT on the gain (subject to the annual exemption). Income distributions from the fund are taxable as either dividend or interest income depending on the fund's holdings.
CISI IoI Taxation of Investments 2
What is 'bed and ISA' in the context of tax planning?