Free CII R03 Practice Exam: Personal Taxation

Last revised: June 29, 2026

Try 50 free CII R03 Personal Taxation (Chartered Insurance Institute Diploma in Regulated Financial Planning) practice exam questions across the exam domains, with answers, explanations, timed mock exams, topic drills, and the Finance Prep next step.

CII means Chartered Insurance Institute. R03 is Personal Taxation in the Diploma in Regulated Financial Planning.

This free full-length CII R03 practice exam includes 50 original Finance Prep questions across the exam domains.

These are original Finance Prep practice questions aligned to the exam outline. They are not official CII questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with mixed sets, topic drills, and timed mock exams in Finance Prep.

Practice count note: exam sponsors can describe total questions, scored questions, duration, or administrative exam-day rules differently. Always confirm current exam-day rules with the sponsor.

Practice questions

Questions 1-25

Question 1

Topic: Taxation of Direct and Indirect Investments

Nadia holds ordinary shares in a UK listed company in a general investment account. The shares are not held in an ISA or pension.

In 2025/2026, she:

receives a cash dividend of £1,200 on the shares; and
sells all of the shares for £18,000, having originally bought them for £12,000.

Ignoring any allowances or exemptions, which tax issue(s) arise from these events?

A. Both Income Tax and Capital Gains Tax, because the dividend is income and the sale is a disposal.
B. Neither Income Tax nor Capital Gains Tax, because the shares are in a general investment account.
C. Income Tax only, because dividends are taxable as savings income.
D. Capital Gains Tax only, because quoted shares are capital assets.

Best answer: A

What this tests: Taxation of Direct and Indirect Investments

Explanation: Dividends from shares held outside an ISA or pension are income and are dealt with under Income Tax rules as dividend income, not savings income. A sale of shares is a disposal for Capital Gains Tax purposes. If the sale proceeds exceed the allowable acquisition cost, a chargeable gain may arise, subject to any available exemptions, losses, or reliefs. The fact that the shares are quoted or held in a general investment account does not remove the tax analysis. The dividend and the disposal are separate tax events, so both Income Tax and CGT issues arise here.

Treating the dividend as savings income is incorrect; company dividends are dividend income for Income Tax purposes.
Treating the sale as the only tax issue ignores the separate receipt of the cash dividend.
A general investment account does not provide the tax shelter available through an ISA or pension wrapper.

The cash dividend is potentially taxable dividend income, while selling the shares for more than their acquisition cost is a potential CGT disposal.

Question 2

Topic: Personal Taxation Applied to Investment Advice

During 2025/2026, Nisha disposes of several investment holdings.

CGT facts:

Her taxable income uses £34,700 of the £37,700 basic rate band.
She has no brought-forward capital losses.
She has not used her annual exempt amount.
The annual exempt amount is £3,000.
CGT on non-residential investment gains is 18% to the extent gains fall within the unused basic rate band and 24% above that.

Holding disposed of	Result before annual exempt amount	Relevant note
UK equity OEIC outside an ISA	Gain £17,000	Chargeable asset
Listed shares outside an ISA	Loss £4,500	Allowable loss
UK gilt	Gain £2,200	Exempt from CGT
Stocks and shares ISA holding	Gain £3,600	Exempt from CGT

Which CGT conclusion is correct?

A. Taxable gains are £9,500 and the CGT liability is £1,710.
B. Taxable gains are £9,500 and the CGT liability is £2,100.
C. Taxable gains are £14,000 and the CGT liability is £3,180.
D. Taxable gains are £15,300 and the CGT liability is £3,492.

Best answer: B

What this tests: Personal Taxation Applied to Investment Advice

Explanation: The exempt gilt and ISA gains are left out of the CGT computation. The chargeable OEIC gain of £17,000 is reduced by the allowable share loss of £4,500, giving net chargeable gains of £12,500. The £3,000 annual exempt amount is then deducted, leaving taxable gains of £9,500. Nisha has £3,000 of unused basic rate band (£37,700 less £34,700). Therefore, £3,000 of the taxable gain is charged at 18% and the remaining £6,500 is charged at 24%. The CGT is £540 plus £1,560, giving £2,100.

A £1,710 liability uses the correct taxable gain but taxes all of it at 18%, ignoring that only £3,000 of the basic rate band remains.
A £3,180 liability ignores the allowable loss on the listed shares outside the ISA.
A £3,492 liability wrongly brings the exempt gilt and ISA gains into the CGT computation.

The chargeable gain is reduced by the allowable loss and annual exempt amount, then split between the remaining basic rate band and the higher CGT rate.

Question 3

Topic: Taxation of Direct and Indirect Investments

Sara has used her ISA subscription for 2025/26 and is comparing two taxable FTSE-linked structured products for a £40,000 investment.

Tax position: Basic-rate taxpayer; personal savings allowance and dividend allowance fully used; no capital disposals this tax year.
CGT assumptions: £3,000 annual exempt amount is available; any taxable non-residential gain would fall within the basic-rate CGT band and be taxed at 18%.
Product facts:
- Structured deposit: all of a potential £8,000 profit at maturity would be savings interest.
- Capital-at-risk structured investment: pays no income; all of a potential £8,000 profit at maturity would be a chargeable gain.
Non-tax: Both products have been assessed as suitable for her risk profile and investment term.

Which is the best tax conclusion?

A. Choose an onshore life assurance bond instead, as 5% tax-deferred withdrawals are exempt from tax and use the CGT annual exempt amount.
B. Choose the capital-at-risk structured investment, as its £8,000 profit would produce less tax than the structured deposit’s £8,000 interest.
C. Choose direct UK shares instead, as reinvested dividends are treated as capital gains rather than dividend income.
D. Choose the structured deposit, as deposit-based structured product returns are outside Income Tax for basic-rate taxpayers.

Best answer: B

What this tests: Taxation of Direct and Indirect Investments

Explanation: The tax treatment of a structured product depends on its legal form and terms. A structured deposit normally produces savings income, so Sara would pay Income Tax on the £8,000 profit because her personal savings allowance is already used. As a basic-rate taxpayer, that tax would be £1,600. The capital-at-risk structured investment is stated to produce a chargeable gain. Sara can use her £3,000 CGT annual exempt amount, leaving £5,000 taxable at 18%, giving £900 tax. The capital treatment is therefore more efficient on the facts, assuming both products are otherwise suitable.

Deposit protection or basic-rate taxpayer status does not make structured deposit interest tax-free.
Reinvesting dividends on direct shares does not change them into capital gains.
Onshore bond 5% withdrawals are tax deferred, not exempt, and chargeable event gains fall under Income Tax rather than CGT.

The CGT liability would be £900 after the £3,000 annual exempt amount, compared with £1,600 Income Tax on the structured deposit interest.

Question 4

Topic: UK Tax System for Individuals and Trusts

A paraplanner is reviewing a client compliance note for the 2025/2026 tax year and must classify the issue.

Client record:

The client’s employment income was taxed correctly through PAYE.
Before adding property income, £1,000 of the basic-rate band remains available.
Untaxed rental profit of £7,200 was fully included on the online self assessment return.
Income Tax rates to apply to the rental profit are 20% within the basic-rate band and 40% above it.
HMRC’s coding-out rule supplied for this case: an underpayment of less than £3,000 may be collected through a later PAYE code if the online return is submitted by 30 December and the client requests coding out.
The return was submitted on 18 December and coding out was requested.
The PAYE coding notice then issued with no adjustment for the self assessment underpayment.

Which classification best fits the concern in the record?

A. Coding, because the underpayment is £2,680 and appears eligible to be collected through PAYE code adjustment.
B. Payment, because the rental profit creates an underpayment of £3,200 that must be paid directly by 31 January.
C. Tax avoidance, because requesting PAYE collection for rental-profit tax is an artificial tax arrangement.
D. Reporting, because the rental profit has not been disclosed on the self assessment return.

Best answer: A

What this tests: UK Tax System for Individuals and Trusts

Explanation: The issue is the PAYE code, not a failure to disclose income or a tax-avoidance concern. The extra tax on the rental profit is calculated by using the remaining basic-rate band first: £1,000 at 20% gives £200, and the remaining £6,200 at 40% gives £2,480. The total underpayment is therefore £2,680. The supplied coding-out condition is met because the amount is less than £3,000, the return was submitted by 30 December, and the client requested coding out. Since the coding notice contains no adjustment, the concern is properly classified as a coding issue.

Treating the matter as a direct payment issue relies on an incorrect £3,200 computation and ignores the supplied coding-out conditions.
Treating it as a reporting issue conflicts with the record, which states that the rental profit was fully included on the return.
Treating it as tax avoidance is unsupported, as using HMRC’s PAYE coding-out process is not an artificial arrangement.

The rental profit creates extra tax of £2,680, which is below the supplied £3,000 coding-out limit and the return was filed by the required date.

Question 5

Topic: Taxation of Direct and Indirect Investments

A client is considering a relief-at-source personal pension contribution for 2025/2026.

Client facts:

Salary: £125,140.
No other income, deductions, or pension contributions.
Proposed net personal pension contribution: £16,000.
The pension provider will add basic-rate relief, making the gross contribution £20,000.

Tax facts:

Personal allowance: £12,570.
The personal allowance is reduced by £1 for every £2 of adjusted net income above £100,000.
Basic-rate band: £37,700.
Higher-rate tax: 40%.
A gross relief-at-source pension contribution reduces adjusted net income and extends the basic-rate band by the gross contribution.

What additional Income Tax relief will the client obtain from HMRC, in addition to the £4,000 basic-rate relief added by the provider?

A. £6,000
B. £8,000
C. £12,000
D. £4,000

Best answer: B

What this tests: Taxation of Direct and Indirect Investments

Explanation: Without the contribution, adjusted net income is £125,140, so the personal allowance is fully withdrawn. Tax is £37,700 at 20% and £87,440 at 40%, giving £42,516. With a £20,000 gross pension contribution, adjusted net income falls to £105,140. The personal allowance is reduced by £2,570, leaving £10,000. Taxable income is therefore £115,140. The basic-rate band is extended to £57,700, with the remaining £57,440 taxed at 40%, giving total tax of £34,516. The reduction in the client’s tax bill is £8,000. This is separate from the £4,000 basic-rate relief added to the pension by the provider.

£4,000 only reflects the extra 20% relief on the gross contribution from extending the basic-rate band.
£6,000 does not match either the higher-rate relief or the personal allowance restoration effect.
£12,000 is the total economic tax relief including the provider’s £4,000 basic-rate addition, not the additional relief from HMRC.

The £20,000 gross contribution restores £10,000 of personal allowance and extends the basic-rate band, reducing the client’s Income Tax bill by £8,000.

Question 6

Topic: UK Tax System for Individuals and Trusts

On 1 May 2025, Amira settles £500,000 cash into a new discretionary trust for her nieces. The trustees will pay any Inheritance Tax arising from the trust fund.

Earlier transfer:

1 August 2020: chargeable lifetime transfer of £125,000
No other chargeable transfers were made in the seven years before the May 2025 settlement
All figures are after any available exemptions

Assume the IHT nil rate band is £325,000 and lifetime IHT on chargeable lifetime transfers above the available nil rate band is charged at 20%.

What immediate IHT is payable on the May 2025 settlement?

A. Nil
B. £60,000
C. £75,000
D. £35,000

Best answer: B

What this tests: UK Tax System for Individuals and Trusts

Explanation: A lifetime transfer into a discretionary trust is normally a chargeable lifetime transfer, not a potentially exempt transfer. Earlier chargeable lifetime transfers in the seven years before the new transfer are set against the nil rate band first. Amira’s 2020 transfer uses £125,000 of the £325,000 nil rate band, leaving £200,000 available for the 2025 trust settlement. The chargeable excess is therefore £500,000 - £200,000 = £300,000. Because the trustees are paying the lifetime IHT from the trust fund, the lifetime rate of 20% is applied directly, giving £60,000. Grossing-up would only be relevant if the settlor paid the tax personally.

Treating the settlement as a potentially exempt transfer is incorrect because it is made into a discretionary trust.
Using £35,000 ignores the earlier chargeable lifetime transfer and wrongly gives the settlement the full nil rate band.
Using £75,000 reflects grossing-up, which is not needed because the trustees are paying the tax from the fund.

The earlier chargeable lifetime transfer uses £125,000 of the nil rate band, leaving £200,000, so £300,000 of the trust settlement is taxed at 20%.

Question 7

Topic: Personal Taxation Applied to Investment Advice

Amrita is UK resident and domiciled. On 10 October 2025 she transfers a portfolio of quoted shares valued at £430,000 into a discretionary trust.

Relevant facts:

She has made no previous chargeable lifetime transfers in the previous seven years.
No business relief, spouse exemption, charity exemption, or other relief applies.
Her annual exemption is £3,000 for 2025/2026.
Her unused annual exemption from 2024/2025 is also £3,000.
The nil rate band is £325,000.
The lifetime IHT rate on a chargeable lifetime transfer above the available nil rate band is 20%.
The trustees will pay any lifetime IHT due.

What immediate IHT liability arises on the transfer?

A. £21,000
B. £39,600
C. £19,800
D. £18,600

Best answer: C

What this tests: Personal Taxation Applied to Investment Advice

Explanation: A transfer into a discretionary trust is a chargeable lifetime transfer. Available annual exemptions are deducted before applying the nil rate band. Amrita can use the current tax year’s £3,000 annual exemption and the unused £3,000 exemption from the previous tax year, reducing the £430,000 transfer to £424,000. With no earlier chargeable transfers, the full £325,000 nil rate band is available. The excess is £99,000. Because the trustees pay the lifetime IHT, the tax is charged at 20%, giving £99,000 × 20% = £19,800.

£18,600 uses only one £3,000 annual exemption and ignores the unused exemption from the previous tax year.
£21,000 applies the nil rate band but fails to deduct the available annual exemptions.
£39,600 applies a 40% death rate rather than the 20% lifetime rate stated for this chargeable lifetime transfer.

The chargeable transfer is £424,000 after two £3,000 annual exemptions, leaving £99,000 taxable at 20%.

Question 8

Topic: Personal Taxation Applied to Investment Advice

Harriet is reviewing a proposed estate-planning transfer for a UK-resident and UK-domiciled client, Dana.

Facts:

On 1 June 2021, Dana made a chargeable lifetime transfer to a discretionary trust of £150,000 after exemptions and reliefs.
On 15 September 2025, she plans to transfer OEIC units worth £300,000 into another discretionary trust.
She has the full 2025/2026 annual exemption of £3,000 available and the full unused 2024/2025 annual exemption of £3,000 available.
There are no other reliefs or exemptions.
The IHT nil rate band is £325,000 and the lifetime rate on any excess is 20%.
The trustees will pay any IHT due from trust funds.

What is the best conclusion for Harriet to give Dana before the transfer is made?

A. No immediate IHT is due because the proposed transfer is below the nil rate band after annual exemptions.
B. The immediate IHT charge is £24,400 because only the 2025/2026 annual exemption can be deducted.
C. The transfer is a chargeable lifetime transfer and would create an immediate IHT charge of £23,800.
D. The immediate IHT charge is £58,800 because the full transfer after annual exemptions is taxed at 20%.

Best answer: C

What this tests: Personal Taxation Applied to Investment Advice

Explanation: A lifetime transfer into a discretionary trust is normally a chargeable lifetime transfer. For the immediate lifetime IHT calculation, chargeable transfers made in the previous seven years reduce the available nil rate band. Dana’s 2021 chargeable transfer of £150,000 leaves £175,000 of the £325,000 nil rate band. The planned transfer is reduced by the current annual exemption and the unused annual exemption carried forward from the previous tax year, giving £300,000 - £6,000 = £294,000. The excess over the remaining nil rate band is £294,000 - £175,000 = £119,000. As the trustees will pay the tax, the lifetime rate is 20%, giving IHT of £23,800.

Treating the transfer as below the nil rate band ignores the earlier chargeable lifetime transfer that reduces the available nil rate band.
Using only one annual exemption overlooks the ability to carry forward the unused annual exemption from the immediately preceding tax year.
Taxing the whole transfer after annual exemptions ignores the remaining nil rate band available against the new chargeable transfer.

The prior chargeable transfer uses £150,000 of the nil rate band, leaving £175,000, so £119,000 of the proposed £294,000 transfer is taxed at 20%.

Question 9

Topic: Tax Impact, Planning, and Financial Affairs

Nadia, a higher-rate taxpayer, holds listed shares in a general investment account. They are not held in an ISA or pension.

Proposed transfers:

Shares bought for £24,000 are now worth £68,000.
Nadia is considering selling them to her adult son for £24,000.
As an alternative, she is considering giving the shares outright to a UK registered charity.
She wants to understand the main personal tax issue before deciding.

What is the best conclusion?

A. Both transfers would be no gain/no loss disposals because they are gifts or transfers made without commercial profit.
B. Selling to her son would be treated as a market value disposal for Capital Gains Tax, while an outright gift of the listed shares to the charity would normally avoid Capital Gains Tax and may qualify for Income Tax relief.
C. The charity gift would create a chargeable gain based on market value, but the sale to her son would use the £24,000 actually received.
D. Selling to her son for £24,000 would avoid Capital Gains Tax because her actual proceeds equal her original cost.

Best answer: B

What this tests: Tax Impact, Planning, and Financial Affairs

Explanation: For Capital Gains Tax, transfers to connected persons, including children, are normally treated as taking place at market value. Nadia cannot avoid a gain by selling the shares to her son for the original cost when the shares are worth £68,000. By contrast, an outright gift of qualifying listed shares to a UK registered charity is generally exempt from Capital Gains Tax and can also provide Income Tax relief based on the value of the gift, subject to the usual rules. The professional response should identify the connected-person market value issue and the different charitable-giving treatment, rather than focusing only on the cash received.

Using actual proceeds for the son’s purchase ignores the connected-person market value rule.
No gain/no loss treatment is generally for transfers between spouses or civil partners, not adult children or charities as a general rule.
Treating the charity gift as chargeable while using actual proceeds for the son reverses the usual tax treatment.

A son is a connected person for Capital Gains Tax market value rules, whereas qualifying shares gifted to charity receive favourable tax treatment.

Question 10

Topic: Taxation of Direct and Indirect Investments

Priya asks how to deal with a recent sale of a non-ISA fund.

Facts:

She is UK resident and domiciled.
She held accumulation shares in a UK-authorised OEIC throughout 2025/26.
The fund is an equity fund; less than 60% of its assets are interest-bearing investments and cash.
The annual tax voucher shows a £1,600 distribution that was automatically accumulated, with no cash paid to Priya.
She sold all the shares in January 2026, and the provider’s disposal statement says the capital gain figure has not been adjusted for accumulated distributions.

What is the best conclusion for the adviser to give?

A. Declare the £1,600 as savings income because all authorised OEIC distributions are treated as interest.
B. Treat the sale proceeds as income because accumulation shares convert all growth into taxable income when sold.
C. Ignore the £1,600 because no cash was received, and tax the whole profit only as a capital gain on sale.
D. Declare the £1,600 as dividend income and treat the sale as a CGT disposal, adding the accumulated distribution to allowable cost if it has not already been reflected.

Best answer: D

What this tests: Taxation of Direct and Indirect Investments

Explanation: Income from an onshore collective is taxed according to the nature of the distribution, not simply by whether cash is paid. For a UK-authorised equity OEIC where the interest-bearing asset test is not met, distributions are dividend income. Accumulation shares do not defer the Income Tax point: the investor is treated as receiving the distribution and reinvesting it. On a later sale, the OEIC shares are chargeable assets for CGT. To prevent double taxation, accumulated income that has already been taxed as income can be reflected in the allowable cost if the provider’s gain figure has not already done so.

No cash receipt does not mean no Income Tax charge; accumulated distributions are still taxable.
Interest treatment applies to qualifying bond-style funds, not to this equity OEIC on the facts given.
Accumulation shares do not turn capital growth or sale proceeds into income; the sale remains within CGT rules.

An onshore equity OEIC distribution is taxed as dividend income even when accumulated, and the sale of the shares is a CGT disposal.

Question 11

Topic: Taxation of Direct and Indirect Investments

For 2025/26, Iqra is comparing two non-ISA investments and will sell only one of them. Calculate each disposal separately, assuming the full CGT annual exempt amount is available in each case.

Tax facts:

CGT annual exempt amount: £3,000
CGT rate on taxable gains: 20%
Ignore dealing costs, losses and any other disposals.

Investment facts:

Each holding was bought for £40,000 and sold for £50,000.
Onshore OEIC accumulation units: £1,200 of accumulated dividend distributions arose during ownership. These were taxable as income and added to the CGT base cost.
UK investment trust company shares: £1,200 of cash dividends were paid during ownership. These were taxable as dividend income and were not added to the share base cost.

What CGT would be payable on each disposal?

A. OEIC accumulation units: £1,400; investment trust company shares: £1,400
B. OEIC accumulation units: £1,400; investment trust company shares: £1,160
C. OEIC accumulation units: £1,160; investment trust company shares: £1,160
D. OEIC accumulation units: £1,160; investment trust company shares: £1,400

Best answer: D

What this tests: Taxation of Direct and Indirect Investments

Explanation: For an onshore collective investment held as accumulation units, income accumulated within the fund is still taxable as income when it arises, but it is also added to the investor’s CGT base cost to prevent double taxation on disposal. The OEIC gain is therefore £50,000 minus £41,200, giving £8,800. After the £3,000 annual exempt amount, the taxable gain is £5,800 and CGT at 20% is £1,160. Shares in an investment trust company are treated as company shares. Cash dividends are taxed as dividend income, but they do not increase the base cost of the shares. The investment trust gain is therefore £10,000, reduced by the £3,000 exemption to £7,000, giving CGT of £1,400.

Treating both gains as £10,000 ignores the CGT base cost adjustment for OEIC accumulation distributions.
Giving both investments the lower CGT figure wrongly treats investment trust cash dividends as if they increased share base cost.
Reversing the figures confuses the tax treatment of collective accumulation units with ordinary investment company shares.

The OEIC gain is reduced by the accumulated distributions added to base cost, whereas the investment trust share base cost is not increased by cash dividends.

Question 12

Topic: Taxation of Direct and Indirect Investments

Priya is a UK-resident individual buying a flat in Manchester as a buy-to-let investment in 2025/2026. The purchase will complete for £260,000. She has not yet received any rent and has no plans to sell or gift the property.

Which tax is most directly relevant to the immediate tax consequence of completing the purchase?

A. Stamp Duty Land Tax
B. National Insurance Contributions
C. Income Tax
D. Capital Gains Tax

Best answer: A

What this tests: Taxation of Direct and Indirect Investments

Explanation: For an individual buying an investment property in England, the immediate tax issue on completion is Stamp Duty Land Tax. Rental profits may later be subject to Income Tax once the property is let, and a gain on a later disposal may be subject to Capital Gains Tax. National Insurance Contributions do not normally apply just because an individual owns a buy-to-let property. The facts point to an acquisition, not rental income or a disposal, so SDLT is the relevant tax.

Income Tax would be relevant to taxable rental profits, but no rent has yet been received.
Capital Gains Tax would be relevant to a chargeable gain on sale or gift, but there has been no disposal.
National Insurance Contributions are not the normal tax charge on passive property investment ownership.

SDLT is the main transaction tax on acquiring land and buildings in England, including a buy-to-let property.

Question 13

Topic: Taxation of Direct and Indirect Investments

A client lets out a residential flat and asks what he should include in his 2025/2026 self assessment return.

Facts:

Gross rent received: £18,000
Letting agent fees: £1,200
Repairs to existing kitchen units: £900
Replacement sofa for the tenant’s use: £700
Landlord insurance: £300
Mortgage interest on the let property: £4,000
Cost of building a small extension: £6,000

His other income has already used his personal allowance and basic-rate band. Assume residential finance costs receive a 20% tax reduction and are not deducted from rental profit. What is the best conclusion?

A. He should report taxable property income of £14,900 and pay £5,160 of extra Income Tax after the finance cost tax reduction.
B. He should report taxable property income of £15,600 and pay £5,440 of extra Income Tax after the finance cost tax reduction.
C. He should report taxable property income of £4,900 and pay £1,960 of extra Income Tax.
D. He should report taxable property income of £10,900 and pay £4,360 of extra Income Tax.

Best answer: A

What this tests: Taxation of Direct and Indirect Investments

Explanation: Property income is calculated by deducting allowable revenue expenses from rents. The letting agent fees, repairs to existing items, replacement domestic item, and insurance are deductible, giving £18,000 - £1,200 - £900 - £700 - £300 = £14,900. The extension is capital expenditure and is not deducted from rental income. For residential property, mortgage interest is not deducted in arriving at rental profit; instead, it gives a basic-rate tax reduction. As the client is taxed at 40%, the Income Tax on £14,900 is £5,960. The finance cost reduction is 20% of £4,000, or £800, leaving additional Income Tax of £5,160.

Deducting mortgage interest from rental profit gives the wrong taxable property income because residential finance costs are relieved separately.
Claiming the extension cost against rent is incorrect because it is capital expenditure, not a revenue expense.
Omitting the replacement sofa relief overstates taxable property income, as a replacement domestic item can be deductible when conditions are met.

Allowable revenue expenses reduce the rental profit to £14,900, and 40% tax of £5,960 is reduced by £800 for mortgage interest relief.

Question 14

Topic: UK Tax System for Individuals and Trusts

Amira sold a workshop used in her sole-trader business in July 2025 and made a valid rollover relief claim.

Disposal and reinvestment facts:

Net sale proceeds: £250,000
Allowable acquisition cost: £170,000
Replacement qualifying business premises bought within the permitted period: £230,000
She has no other gains or losses in 2025/26.
She is a higher-rate taxpayer.

Tax-year facts provided:

Annual exempt amount: £3,000
CGT rate applying to Amira’s taxable gain: 24%
Rollover relief defers the gain except to the extent that sale proceeds are not reinvested.

What CGT is payable on the disposal?

A. £0
B. £18,480
C. £4,080
D. £14,400

Best answer: C

What this tests: UK Tax System for Individuals and Trusts

Explanation: Rollover relief can defer a gain on the disposal of a qualifying business asset when the proceeds are reinvested in qualifying replacement business assets. Where only part of the proceeds is reinvested, the gain is not fully deferred. The immediate chargeable gain is the amount of sale proceeds not reinvested, limited to the actual gain. Amira’s gain before relief is £80,000 (£250,000 less £170,000). She reinvested £230,000, so £20,000 of proceeds was not reinvested. This £20,000 remains chargeable. After the £3,000 annual exempt amount, the taxable gain is £17,000. At 24%, the CGT payable is £4,080.

£0 would apply only if all the proceeds had been reinvested and the gain fully deferred.
£14,400 treats the deferred part of the gain as taxable, rather than taxing only the unreinvested proceeds.
£18,480 ignores rollover relief and taxes the whole gain after the annual exempt amount.

The unreinvested proceeds create an immediate gain of £20,000, reduced by the £3,000 annual exempt amount and taxed at 24%.

Question 15

Topic: UK Tax System for Individuals and Trusts

A client is UK resident and domiciled throughout 2025/26. She has no Gift Aid payments, pension contributions, employment benefits, or other reliefs.

Income for 2025/26:

Source	Amount
Employment earnings	£34,000
Occupational pension income	£8,000
Net rental profit after allowable expenses	£5,000
Bank interest, paid gross	£2,500
Dividends from UK shares outside an ISA	£3,000

Tax facts to use:

Personal Allowance: £12,570.
Basic rate band: £37,700.
Non-savings and savings rates: 20% basic rate, 40% higher rate.
Personal Savings Allowance: £1,000 for a basic-rate taxpayer, £500 for a higher-rate taxpayer.
Dividend allowance: £500; dividend rates are 8.75% basic rate and 33.75% higher rate.
Taxable non-savings income is taxed first, then savings income, then dividends.

What is her total Income Tax liability for 2025/26 before any PAYE deductions?

A. £8,062.25
B. £7,962.25
C. £8,455.00
D. £7,504.75

Best answer: A

What this tests: UK Tax System for Individuals and Trusts

Explanation: Employment earnings, pension income, and rental profit are non-savings income. They total £47,000, reduced by the £12,570 Personal Allowance, leaving £34,430 taxed at 20%, giving £6,886. This leaves £3,270 of the basic rate band. The £2,500 bank interest is taxed next. Because total taxable income exceeds the basic rate band, the client is a higher-rate taxpayer, so the Personal Savings Allowance is £500. Savings tax is therefore £2,000 at 20%, which is £400. Dividends are taxed last. After non-savings income and savings income, £770 of the basic rate band remains. The £500 dividend allowance uses part of that band at 0%, £270 is taxed at 8.75%, and the remaining £2,230 is taxed at 33.75%. Dividend tax is £776.25, giving total Income Tax of £8,062.25.

Using the £1,000 Personal Savings Allowance would be wrong because the client is a higher-rate taxpayer once all taxable income is considered.
Taxing all dividends above the dividend allowance at the basic dividend rate ignores the band used by non-savings and savings income.
Treating the dividend allowance as if it does not use rate-band capacity understates the amount of dividend income taxed at the higher dividend rate.

Her non-savings income uses most of the basic rate band, all savings interest remains basic-rate income, and part of the dividends falls into the higher-rate band.

Question 16

Topic: Personal Taxation Applied to Investment Advice

Beth wants to avoid losing any personal allowance in 2025/2026 with the smallest net payment to a personal pension.

Facts:

Employment income: £104,570.
No other taxable income, Gift Aid payments, or pension contributions.
Personal allowance: £12,570, reduced by £1 for every £2 of adjusted net income over £100,000.
A relief-at-source personal pension contribution is paid net of basic-rate tax: an £80 net payment gives a £100 gross contribution.
The gross contribution reduces adjusted net income, and the contribution is within her relevant UK earnings and available pension allowance.

Which recommendation best achieves Beth’s aim?

A. Pay £3,656 net to a relief-at-source personal pension so the £4,570 gross contribution reduces adjusted net income to £100,000.
B. Pay £4,570 net to a relief-at-source personal pension because the excess income over £100,000 must be paid by Beth personally.
C. Pay £2,285 net to a relief-at-source personal pension because that equals the personal allowance she would otherwise lose.
D. Make no personal pension contribution because relief-at-source contributions only affect the pension fund, not the Income Tax computation.

Best answer: A

What this tests: Personal Taxation Applied to Investment Advice

Explanation: For the personal allowance taper, the starting point is adjusted net income. Beth’s income is £104,570, so she is £4,570 above the £100,000 threshold. A relief-at-source pension contribution is treated at its gross amount for this purpose, not the amount paid from her bank account. Therefore, a £4,570 gross contribution is needed to reduce adjusted net income to £100,000. Relief at source means the provider claims basic-rate relief, so Beth pays 80% of the gross amount: £4,570 × 80% = £3,656. Paying less would leave some tapering of the personal allowance; paying £4,570 net would remove the taper but would be more than required for her stated aim.

Paying £4,570 net confuses the gross contribution with the client’s net payment and overfunds for the stated aim.
Paying £2,285 net matches the personal allowance reduction, not the income excess that must be removed from adjusted net income.
Making no contribution ignores that gross relief-at-source pension contributions can reduce adjusted net income for the personal allowance taper.

Beth needs a £4,570 gross contribution, and under relief at source she pays 80% of that amount, which is £3,656.

Question 17

Topic: Taxation of Direct and Indirect Investments

Amira invested £120,000 as the full premium into an onshore single-premium life assurance bond. During the first policy year:

She takes cash withdrawals of £5,400.
Her ongoing adviser fee of £1,200 is paid by the life office by cancelling units in the bond and paying the adviser directly.
There have been no previous withdrawals.

For chargeable event purposes, what is the effect of the adviser fee in the first policy year?

A. It creates a Capital Gains Tax disposal instead of a chargeable event calculation.
B. It reduces the original premium, so the 5% allowance is calculated on £118,800.
C. It counts as a withdrawal, so total withdrawals are £6,600 and £600 exceeds the 5% tax-deferred allowance.
D. It is ignored because it is paid directly to the adviser rather than to Amira.

Best answer: C

What this tests: Taxation of Direct and Indirect Investments

Explanation: For a life assurance bond, withdrawals of up to 5% of the premium for each policy year can usually be taken on a tax-deferred basis, with unused allowance carried forward. The allowance here is 5% of £120,000, which is £6,000 for the first policy year. A fee paid from the bond to the adviser by cancelling units is treated as a withdrawal for chargeable event purposes. Amira’s cash withdrawals of £5,400 plus the adviser fee of £1,200 total £6,600. This exceeds the first-year 5% allowance by £600, so that excess is a chargeable event gain for the policy year.

Paying the fee directly to the adviser does not stop it counting when the bond value is used to fund the payment.
The premium is not reduced because the full £120,000 was invested as the policy premium.
Investment bond withdrawals are dealt with under the chargeable event rules, not as Capital Gains Tax disposals.

The provider-facilitated adviser fee is treated as a withdrawal from the bond and uses part of the 5% cumulative allowance.

Question 18

Topic: Tax Impact, Planning, and Financial Affairs

Marcus, a UK-resident and UK-domiciled widower, holds quoted company shares directly, outside an ISA.

Proposed gift:

Original acquisition cost: £28,000
Current market value: £70,000
Recipient: his adult daughter
Consideration: none
Marcus has already used his 2025/2026 Capital Gains Tax annual exempt amount and has no available losses.

What is the best tax conclusion if Marcus gives the shares to his daughter?

A. Marcus has no CGT liability because he receives no sale proceeds, and his daughter inherits his £28,000 base cost.
B. Marcus is treated as disposing of the shares at market value, creating a £42,000 chargeable gain, and his daughter acquires them at a £70,000 base cost.
C. Marcus creates a capital loss of £28,000 because the disposal proceeds are nil, and his daughter has a nil base cost.
D. Marcus can transfer the shares on a no gain, no loss basis because the recipient is a close family member.

Best answer: B

What this tests: Tax Impact, Planning, and Financial Affairs

Explanation: For Capital Gains Tax, gifting a direct investment is still a disposal. Where the recipient is a connected person, such as a child, the disposal proceeds are deemed to be the market value at the date of the gift, even if no money changes hands. Marcus is therefore treated as disposing of shares worth £70,000 with an original cost of £28,000, giving a £42,000 chargeable gain before applying any tax rate. His daughter’s base cost for a later disposal is normally the market value used for Marcus’s disposal. The no gain, no loss rule applies to transfers between spouses and civil partners living together, not to gifts to adult children. Separately, the gift may also be relevant for Inheritance Tax as a potentially exempt transfer.

Receiving no sale proceeds does not prevent a CGT disposal where shares are gifted to a connected person.
Nil consideration does not create a capital loss; market value replaces actual proceeds for connected-person gifts.
No gain, no loss treatment is for spouses and civil partners, not children or other family members generally.

A gift to a connected person is treated as a disposal at market value for CGT, and the recipient’s acquisition cost is normally that market value.

Question 19

Topic: Taxation of Direct and Indirect Investments

A client is choosing between two offshore collective funds outside an ISA or pension. Both funds track the same index and are equally suitable for risk, charges, and access, so tax is the deciding factor.

2025/26 tax facts for the client:

Higher-rate taxpayer; dividend tax rate: 33.75%.
Income tax rate on an offshore income gain: 40%.
CGT rate for this disposal: 24%.
Full CGT annual exempt amount available: £3,000.
No dividend allowance remains.
Ignore dealing costs.

Expected taxable amounts if she sells in 2025/26:

Offshore reporting fund: dividend-taxable excess reportable income of £1,600 and a disposal gain of £18,000 taxed as a chargeable gain.
Offshore non-reporting fund: dividend-taxable distribution of £1,600 and an offshore income gain of £18,000 on disposal.

Based only on the tax computation, which recommendation is most tax-efficient, and what is the tax saving compared with the other fund?

A. Either fund; the total tax is the same because the £1,600 income amount is dividend-taxable in both cases.
B. Recommend the offshore non-reporting fund; it saves £3,600 in tax.
C. Recommend the offshore reporting fund; it saves £2,880 in tax.
D. Recommend the offshore reporting fund; it saves £3,600 in tax.

Best answer: D

What this tests: Taxation of Direct and Indirect Investments

Explanation: With an offshore reporting fund, reportable income is taxed as income and the disposal is taxed under CGT. The £1,600 dividend-taxable amount is identical in both funds, giving £540 tax in each case. The reporting fund’s disposal tax is based on £18,000 less the £3,000 annual exempt amount, so £15,000 at 24% = £3,600. Total tax is £4,140. The non-reporting fund’s £18,000 disposal profit is an offshore income gain taxed at 40%, giving £7,200, plus the same £540 on the distribution. Total tax is £7,740. The reporting fund therefore saves £3,600.

A £2,880 saving ignores the available CGT annual exempt amount.
The non-reporting fund is not more tax-efficient because its disposal profit is taxed as income, not CGT.
Treating the funds as tax-neutral looks only at the identical income amount and misses the different disposal treatment.

The reporting fund uses CGT treatment on disposal, so the £3,000 annual exempt amount and 24% CGT rate make it £3,600 cheaper than the non-reporting fund.

Question 20

Topic: UK Tax System for Individuals and Trusts

A paraplanner is preparing Hana’s 2025/2026 Income Tax summary. Hana is UK resident and domiciled.

During the tax year she received:

£38,000 salary from employment, with PAYE deducted.
£650 interest from an ordinary bank deposit account.
£1,200 interest from a cash ISA.
£1,000 NS&I Premium Bond prize.
£4,000 cash birthday gift from her aunt.

Which receipts should be included as taxable income before applying any allowances or 0% tax rates?

A. All five receipts, because Hana received them as cash during the tax year.
B. The ordinary bank deposit interest, cash ISA interest and Premium Bond prize only.
C. The salary and the ordinary bank deposit interest only.
D. The salary, ordinary bank deposit interest and cash ISA interest only.

Best answer: C

What this tests: UK Tax System for Individuals and Trusts

Explanation: For an Income Tax computation, taxable income includes employment income and taxable savings income such as interest from an ordinary bank or building society account. PAYE deduction does not make salary non-taxable; it is simply a method of collecting tax. Cash ISA interest is exempt from Income Tax. NS&I Premium Bond prizes are also tax-free. A personal cash gift received from a relative is not income in the recipient’s hands, although separate Inheritance Tax considerations may arise for the donor. Allowances and 0% rates, such as the personal savings allowance, are applied after identifying the income that is chargeable.

Including cash ISA interest is wrong because ISA income is exempt from Income Tax.
Excluding salary because PAYE has already been deducted is wrong because PAYE does not change the income’s taxable nature.
Treating every cash receipt as taxable is wrong because gifts and tax-free investment prizes are not taxable income for the recipient.

Employment income and ordinary bank interest are chargeable to Income Tax, while ISA interest, Premium Bond prizes and personal gifts are not taxable income for Hana.

Question 21

Topic: Taxation of Direct and Indirect Investments

Amira is UK resident and domiciled. She invested £80,000 in a single-premium offshore life assurance investment bond.

Policy history:

The bond has been held for three complete policy years.
She withdrew £4,000 in each policy year.
The withdrawals were within the cumulative 5% tax-deferred allowance and no previous chargeable event gain has arisen.
She now fully surrenders the bond for £90,000.

Which statement correctly describes the UK tax treatment of the surrender?

A. No immediate tax charge arises because all previous withdrawals were within the 5% tax-deferred allowance.
B. A chargeable event gain of £22,000 arises and is assessed to Income Tax as savings income, with no basic-rate tax treated as paid.
C. A chargeable event gain of £10,000 arises because the earlier 5% withdrawals are ignored on full surrender.
D. A capital gain of £22,000 arises and is subject to Capital Gains Tax after deducting any available annual exempt amount.

Best answer: B

What this tests: Taxation of Direct and Indirect Investments

Explanation: For an offshore life assurance investment bond, the 5% annual withdrawal allowance is tax-deferred, not tax-free. Withdrawals within the cumulative allowance do not create an immediate chargeable event gain, but they are brought into account when the bond is fully surrendered. The chargeable event gain on full surrender is broadly the surrender proceeds plus previous withdrawals, less the original premium and any earlier chargeable gains. Here, £90,000 plus £12,000 less £80,000 gives a gain of £22,000. The gain is taxed under the chargeable event regime as Income Tax, generally as savings income. Unlike an onshore life assurance bond, an offshore bond does not carry a deemed basic-rate tax credit.

Treating only the £10,000 investment growth as taxable ignores the earlier tax-deferred withdrawals.
Capital Gains Tax treatment is incorrect because life assurance policy gains are charged under the Income Tax chargeable event rules.
The 5% allowance defers tax; it does not eliminate the final surrender calculation.

The gain is £90,000 plus £12,000 previous withdrawals less the £80,000 premium, and offshore bond gains do not carry the onshore basic-rate tax credit.

Question 22

Topic: UK Tax System for Individuals and Trusts

Leah is employed and asks a paraplanner to check whether her 2025/2026 payslips have dealt with her employer’s medical insurance.

Payslip summary:

Taxable salary for the tax year: £49,500
Tax code used throughout the year: 1257L
PAYE was operated only on salary.

Employment-benefit note:

Employer paid private medical insurance premium: £1,600
Leah made good £200 to the employer before the required deadline.
The medical insurance benefit was not payrolled.

Tax facts to use:

Personal allowance: £12,570
Basic-rate band: £37,700 at 20%
Income above the basic-rate band is taxed at 40%.

What is the most relevant Income Tax issue to flag?

A. A taxable benefit creates £280 of additional Income Tax.
B. A taxable benefit creates £560 of additional Income Tax.
C. No additional Income Tax is due because the tax code covered the benefit.
D. A taxable benefit creates £406 of additional Income Tax.

Best answer: D

What this tests: UK Tax System for Individuals and Trusts

Explanation: Employer-paid private medical insurance is a taxable employment benefit, reduced by amounts the employee makes good by the required deadline. The payslip summary shows that PAYE was operated only on salary, so the non-payrolled benefit has not been collected through monthly payroll. Leah’s taxable salary after the personal allowance is £49,500 - £12,570 = £36,930. This leaves £770 of the £37,700 basic-rate band unused. The benefit’s cash equivalent is £1,600 - £200 = £1,400. Therefore, £770 is taxed at 20% (£154) and the remaining £630 is taxed at 40% (£252), making £406 of additional Income Tax.

No additional tax is wrong because the payslip summary shows only salary was taxed through PAYE.
£280 taxes the reduced benefit entirely at 20%, ignoring that salary has already used most of the basic-rate band.
£560 taxes the reduced benefit entirely at 40%, ignoring the £770 of basic-rate band still available.

The cash equivalent is £1,400; £770 falls in the unused basic-rate band and £630 falls at 40%, giving £154 + £252 = £406.

Question 23

Topic: Tax Impact, Planning, and Financial Affairs

For 2025/2026, Evie is considering a disposal of quoted shares held outside an ISA. She and her husband, Daniel, are UK resident, living together, and have made no other disposals in the tax year.

Relevant tax facts:

Transfers between spouses who are living together take place on a no gain/no loss basis.
CGT annual exempt amount: £3,000 each.
CGT rates for share gains: 18% for taxable gains falling within unused basic rate band, and 24% thereafter.
Evie has no unused basic rate band.
Daniel has £17,700 of unused basic rate band.

Planned disposal:

Evie’s whole holding cost £20,000.
Expected sale proceeds for the whole holding: £80,000.
Before sale, Evie transfers half the holding to Daniel.
They immediately sell their respective halves for equal proceeds.
Ignore sale costs and losses.

What is their combined CGT liability on the sales?

A. £9,720
B. £12,960
C. £11,898
D. £13,680

Best answer: C

What this tests: Tax Impact, Planning, and Financial Affairs

Explanation: A transfer between spouses or civil partners living together is normally made on a no gain/no loss basis, so Daniel takes over the relevant share of Evie’s original base cost. The whole holding has a gain of £60,000, so each half has a gain of £30,000. Each can use a £3,000 annual exempt amount, leaving £27,000 taxable for each. Evie has no unused basic rate band, so her £27,000 is taxed at 24%, giving £6,480. Daniel has £17,700 of unused basic rate band, taxed at 18% (£3,186), and the remaining £9,300 is taxed at 24% (£2,232). Their total CGT is £6,480 + £5,418 = £11,898.

£9,720 taxes both taxable gains at 18%, but Evie has no unused basic rate band and Daniel’s unused band is only £17,700.
£12,960 gives both partners their annual exemptions but taxes all taxable gains at 24%, ignoring Daniel’s unused basic rate band.
£13,680 is the result if Evie sells the whole holding herself, using only one annual exempt amount and paying 24% on the rest.

Each partner has a £27,000 taxable gain; Evie’s is taxed at 24%, while Daniel uses £17,700 at 18% and £9,300 at 24%, giving £11,898 combined.

Question 24

Topic: Taxation of Direct and Indirect Investments

For 2025/2026, Marcus subscribes for qualifying new shares and all investor conditions are satisfied.

Before EIS and SEIS relief: His Income Tax liability is £32,000.

Subscriptions made:

Qualifying EIS shares: £50,000
Qualifying SEIS shares: £25,000

Relief facts to use:

EIS Income Tax relief is 30% of the qualifying subscription.
SEIS Income Tax relief is 50% of the qualifying subscription.
Relief cannot create a repayment beyond the Income Tax liability for the year.
Ignore carry back and CGT reliefs.

What is Marcus’s Income Tax liability after applying the available EIS and SEIS reliefs?

A. £19,500
B. £0
C. £4,500
D. £17,000

Best answer: C

What this tests: Taxation of Direct and Indirect Investments

Explanation: EIS and SEIS Income Tax reliefs are tax reducers for qualifying subscriptions in new shares. EIS relief is calculated at 30% of the qualifying investment, so Marcus receives £15,000 relief on £50,000. SEIS relief is calculated at 50%, so he receives £12,500 relief on £25,000. The combined relief is therefore £27,500. Because his pre-relief Income Tax liability is £32,000, the full relief can be used and the remaining liability is £4,500. The calculation also illustrates the basic purpose of these schemes: they provide Income Tax relief to encourage investment in higher-risk qualifying companies, with SEIS giving the higher rate for seed-stage businesses.

£17,000 applies only the EIS relief and ignores the separate SEIS relief.
£19,500 applies only the SEIS relief and ignores the separate EIS relief.
£0 overstates the available reducer because the combined relief is £27,500, not enough to eliminate a £32,000 liability.

EIS relief is £15,000 and SEIS relief is £12,500, reducing the £32,000 liability to £4,500.

Question 25

Topic: UK Tax System for Individuals and Trusts

Alison died in January 2026. You are reviewing how trust assets affect the IHT calculation.

Facts:

Personal estate after liabilities and funeral expenses: £700,000.
Qualifying interest in possession trust fund valued at death: £200,000.
Potential beneficiary of a discretionary trust valued at £300,000, with no fixed entitlement to income or capital.
No lifetime chargeable transfers.
Nil rate band: £325,000.
IHT death rate: 40%.
Ignore the residence nil rate band, transferable nil rate band, exemptions, and reliefs.

What is the IHT payable as a result of Alison’s death?

A. £270,000
B. £230,000
C. £350,000
D. £150,000

Best answer: B

What this tests: UK Tax System for Individuals and Trusts

Explanation: For IHT on death, the estate can include assets owned outright and certain trust interests. A qualifying interest in possession is treated as part of the beneficiary’s estate for IHT, so Alison’s £200,000 trust interest is added to her £700,000 personal estate. A mere potential interest in a discretionary trust is not included in her estate because she has no fixed right to income or capital. The chargeable amount is therefore £900,000 minus the £325,000 nil rate band, giving £575,000 taxable at 40%. The IHT payable is £230,000.

£150,000 excludes the qualifying interest in possession trust fund, so it understates the estate.
£270,000 wrongly includes the discretionary trust fund instead of the qualifying interest in possession trust fund.
£350,000 includes both trust funds, but the discretionary trust is not part of Alison’s estate.

The qualifying interest in possession trust fund is included in Alison’s death estate, but the discretionary trust fund is not included because she had no fixed entitlement.

Questions 26-50

Question 26

Topic: Tax Impact, Planning, and Financial Affairs

Amir died in November 2025. He was UK resident and domiciled. His will leaves all assets passing under the will to a discretionary trust for his children.

Use these tax-year facts:

Nil rate band: £325,000
IHT rate on death: 40%
Spouse/civil partner exemption applies to amounts passing to a spouse or civil partner
Ignore the residence nil rate band, debts, expenses, and any transferable nil rate band
Amir had made no previous chargeable lifetime transfers

At death, Amir owned:

Family home: £600,000, owned with his civil partner as beneficial joint tenants
Investment portfolio: £300,000, owned with his adult daughter as tenants in common in equal 50% shares
Sole cash account: £400,000

Which outcome follows from the ownership structures, and what IHT is payable on Amir’s death?

A. The home and the portfolio both pass under the will, and IHT is £210,000.
B. The home passes by survivorship to the civil partner, Amir’s portfolio share passes under the will, and IHT is £90,000.
C. The home and the portfolio both pass by survivorship, and IHT is £30,000.
D. The home passes under the will, Amir’s portfolio share passes by survivorship, and IHT is £150,000.

Best answer: B

What this tests: Tax Impact, Planning, and Financial Affairs

Explanation: A beneficial joint tenancy means the deceased’s interest passes automatically to the surviving joint owner by survivorship, rather than under the will. Here, Amir’s share of the home passes to his civil partner and is covered by the spouse/civil partner exemption. A tenancy in common is different: each owner has a distinct share, so Amir’s 50% share of the £300,000 portfolio, £150,000, passes under his will. His sole cash of £400,000 also passes under the will. The chargeable estate is therefore £550,000. After the £325,000 nil rate band, £225,000 is taxed at 40%, giving IHT of £90,000.

Treating the portfolio as passing by survivorship confuses a tenancy in common with a joint tenancy.
Treating the home as chargeable under the will ignores survivorship and the spouse/civil partner exemption.
Including both jointly held assets as chargeable produces too high a figure because the home transfer is exempt.
Excluding Amir’s 50% portfolio share produces too low a figure because that share passes under the will.

The joint tenancy causes the home share to pass to the civil partner with spouse exemption, while Amir’s 50% portfolio share and sole cash pass to the trust, giving IHT of £90,000.

Question 27

Topic: UK Tax System for Individuals and Trusts

A paraplanner is checking a trustee file for the 2025/26 tax year.

Trustee disposal note:

Trust: UK discretionary trust, not a bare trust, with no vulnerable beneficiary election.
Settlor: alive but excluded from benefit under the trust terms.
Trustees: three UK-resident individual trustees.
Asset sold: listed shares held by the trust, sold through a broker to unconnected buyers.
Disposal: sale proceeds £64,000; allowable cost £45,000; no trust capital losses.
Draft comment: “No CGT action is needed until cash is appointed to beneficiaries. If there is a gain, each trustee can use their own annual exempt amount.”

Which CGT issue should be raised?

A. The gain is automatically assessed on the settlor because the settlor created the trust.
B. The trustees have made a chargeable disposal and should consider the settlement’s trustee annual exempt amount.
C. No CGT issue arises until the trustees appoint the cash to beneficiaries.
D. Each trustee may offset their own personal annual exempt amount against the trust gain.

Best answer: B

What this tests: UK Tax System for Individuals and Trusts

Explanation: A discretionary trust is not treated like a bare trust for CGT. When trustees dispose of trust assets, the trustees are the chargeable persons for the gain on the settled property. The later appointment of cash to beneficiaries does not postpone the CGT event created by selling the shares. The gain is calculated from the disposal proceeds and allowable cost, then any trust capital losses and the trustees’ annual exempt amount are considered. The individual trustees do not each use their own personal annual exempt amount against the trust gain. The facts also state that the settlor is excluded from benefit, so there is no basis here for treating the gain as automatically the settlor’s personal gain.

Waiting until beneficiaries receive cash confuses a capital appointment with the earlier disposal of the trust asset.
Using three personal annual exempt amounts treats the trustees as beneficial owners, which is not how a discretionary trust gain is relieved.
Attributing the gain to the settlor merely because the trust was created by them is not supported by the stated trust terms.

A discretionary trust disposal is assessed on the trustees, using the trust’s CGT rules rather than each trustee’s personal exemption.

Question 28

Topic: Personal Taxation Applied to Investment Advice

Maya died on 15 December 2025. Her executors are checking which lifetime gift first creates an IHT liability as a failed PET.

Use these facts:

Nil rate band: £325,000.
IHT death rate on failed PETs: 40%.
Taper relief reduces the tax, not the gift value.
For deaths between 5 and 6 years after a gift, taper relief reduces the tax by 60%.
The gift values below are after deducting any available exemptions.
There were no other lifetime transfers.

Date of gift	Recipient	Chargeable value
1 October 2018	Nephew	£90,000
1 July 2019	Daughter	£190,000
1 September 2020	Son	£150,000

Which transfer first creates an IHT liability, and how much IHT is payable on that transfer?

A. The 1 October 2018 gift, with IHT of £36,000.
B. The 1 September 2020 gift, with IHT of £2,400.
C. The 1 July 2019 gift, with IHT of £22,000.
D. The 1 September 2020 gift, with IHT of £6,000.

Best answer: B

What this tests: Personal Taxation Applied to Investment Advice

Explanation: The October 2018 gift was made more than seven years before Maya’s death, so it is ignored for this failed PET calculation. The July 2019 gift is within seven years and uses £190,000 of the £325,000 nil rate band, leaving £135,000. The September 2020 gift is also within seven years and has a chargeable value of £150,000, so only £135,000 is covered by the remaining nil rate band. The excess is £15,000. At the 40% death rate, the tax before taper relief is £6,000. Maya died between five and six years after that gift, so taper relief reduces the tax by 60%, leaving 40% of £6,000 payable: £2,400.

Treating the October 2018 gift as taxable ignores that it is outside the seven-year period before death.
Taxing the July 2019 gift overlooks that it is fully covered by the available nil rate band.
Using £6,000 for the September 2020 gift calculates the pre-taper tax but omits the 60% taper relief reduction.

The September 2020 gift exceeds the remaining nil rate band by £15,000, giving tax of £6,000 before 60% taper relief and £2,400 payable.

Question 29

Topic: UK Tax System for Individuals and Trusts

Amara died in July 2025. Her estate after liabilities was £900,000. She had made no lifetime chargeable transfers, and there is no transferable nil rate band or residence nil rate band available.

Her will leaves:

£60,000 to a registered UK charity.
£25,000 to a qualifying UK political party.
The residue to her adult son.

For 2025/2026, assume:

The nil rate band is £325,000.
IHT on death is charged at 40%, or 36% if the charitable legacy is at least 10% of the baseline amount.
Both the charitable gift and the qualifying political party gift are exempt from IHT, but only the charitable gift counts for the reduced-rate test.
For this estate, the baseline amount is calculated after deducting the political party gift and the nil rate band, but before deducting the charitable gift.

What amount of IHT is payable by Amara’s estate?

A. £206,000
B. £176,400
C. £185,400
D. £196,000

Best answer: B

What this tests: UK Tax System for Individuals and Trusts

Explanation: The qualifying political party gift is exempt from IHT. The baseline amount for the charitable giving test is therefore £900,000 less the £25,000 political gift and the £325,000 nil rate band, giving £550,000. Ten percent of this is £55,000, so the £60,000 charitable legacy is sufficient to reduce the death estate IHT rate from 40% to 36%. The chargeable estate is £900,000 less the £25,000 political gift, the £60,000 charitable gift and the £325,000 nil rate band, which is £490,000. IHT is therefore £490,000 at 36% = £176,400.

£196,000 deducts both exempt gifts but incorrectly uses the standard 40% death rate.
£185,400 applies the reduced 36% rate but wrongly treats the political party gift as chargeable.
£206,000 both treats the political party gift as chargeable and misses the reduced charity rate.

The charity gift exceeds 10% of the £550,000 baseline amount, so the taxable estate of £490,000 is charged at 36%.

Question 30

Topic: Tax Impact, Planning, and Financial Affairs

Ruth, age 63, asks whether she should pay £18,000 into a new personal pension before 5 April 2026 rather than use a stocks and shares ISA.

Known facts:

She is UK resident and has not flexibly accessed any money purchase pension benefits.
She receives a defined benefit pension of £22,000 a year.
She has rental profits of £10,000 a year and dividend income of £3,000.
She has made no pension contributions in 2025/26.
She has her full 2025/26 ISA allowance available.
She sometimes undertakes consultancy work, but the adviser has not yet confirmed whether she will be paid for it in 2025/26.

What is the best next step before recommending the pension contribution amount?

A. Recommend the ISA first because Ruth is already receiving pension income.
B. Establish Ruth’s relevant UK earnings from employment or self-employment in 2025/26.
C. Use Ruth’s rental profits and pension income to support the £18,000 pension contribution.
D. Check whether Ruth’s spouse or civil partner has unused pension allowance for 2025/26.

Best answer: B

What this tests: Tax Impact, Planning, and Financial Affairs

Explanation: Before advising Ruth to make an £18,000 personal pension contribution, the adviser must establish whether she has enough relevant UK earnings in 2025/26. Pension income, ordinary rental profits and dividends do not normally count as relevant UK earnings for member contribution tax relief. If Ruth has no relevant earnings, she may still be able to receive tax relief on a gross contribution of up to £3,600, but not on the full £18,000. The ISA allowance fact is already known, and her age or existing defined benefit pension income does not by itself prevent a personal pension contribution. The missing earnings fact controls whether the proposed pension contribution is tax-efficient and eligible for relief.

Pension income and ordinary rental profits are taxable income, but they are not normally relevant UK earnings for personal pension contribution relief.
Being in receipt of a pension does not automatically make an ISA preferable; the pension tax-relief position must be checked first.
A spouse’s or civil partner’s allowance does not create pension tax relief for Ruth’s own contribution.

Personal pension tax relief on member contributions is normally limited to 100% of relevant UK earnings, or £3,600 gross if higher earnings are absent.

Question 31

Topic: Personal Taxation Applied to Investment Advice

Amira, a UK-resident higher-rate taxpayer, asks for an urgent recommendation on using her general investment account before 5 April 2026.

Facts known:

She holds accumulation units in an OEIC now worth £74,000 outside an ISA.
She wants to sell £20,000 and subscribe the proceeds to a stocks and shares ISA; her ISA allowance is unused.
She has made no other disposals in 2025/2026 and has the full £3,000 CGT annual exempt amount available.
The current platform record shows market value only; it does not show purchase dates, original costs, or accumulated income records.
Amira cannot locate the contract notes and says the holding was built up over several years.

What is the best professional response?

A. Recommend selling £20,000 immediately because the unused ISA allowance and annual exempt amount should prevent any tax liability.
B. Recommend a bed and ISA for £20,000 on the assumption that only future returns inside the ISA are relevant.
C. Recommend selling the whole OEIC holding now because she has no other disposals in the tax year.
D. Delay recommending a disposal amount until the historic transaction data has been obtained or reconstructed to estimate the chargeable gain.

Best answer: D

What this tests: Personal Taxation Applied to Investment Advice

Explanation: A sale of units from a general investment account is normally a disposal for CGT, even if the proceeds are immediately subscribed to an ISA. The adviser cannot judge the tax effect from market value alone. The chargeable gain depends on the allowable cost, acquisition history, and relevant accumulated income records. Amira’s full annual exempt amount helps only after the gain has been calculated; it does not shelter £3,000 of sale proceeds. The appropriate professional response is to obtain or reconstruct the missing records before recommending the amount to sell or implying that no CGT will arise.

Using an ISA is tax-efficient for future income and gains, but the initial OEIC sale may still create a taxable gain.
A bed and ISA involves a disposal before the ISA subscription, so the CGT position must be checked first.
Having no other disposals does not prove that selling £20,000, or the whole holding, will fall within the annual exempt amount.

The allowable cost and acquisition history are needed before deciding whether a sale would create a CGT liability or how much can be sold tax-efficiently.

Question 32

Topic: Personal Taxation Applied to Investment Advice

A financial adviser is reviewing estate and investment planning for a client.

Client facts:

The client is UK resident and UK domiciled.
He created an offshore discretionary trust several years ago and he can still benefit from it.
The trustees hold an offshore investment bond and shares in a family trading company.
The trustees are considering appointing assets to the client’s adult children before 5 April.
Earlier trustee loans and distributions have not been fully documented.
The client asks the adviser to confirm the Income Tax, CGT and IHT treatment before giving instructions.

What is the best professional response?

A. Recommend appointing assets to the adult children because such transfers are normally potentially exempt transfers for IHT.
B. Pause any tax-based recommendation and refer the client and trustees for specialist trust and offshore tax advice before implementation.
C. Calculate the likely chargeable event gain on the offshore bond and proceed if the client’s tax band can absorb it.
D. Advise the trustees to delay all action until after 5 April so that the tax position falls into the next tax year.

Best answer: B

What this tests: Personal Taxation Applied to Investment Advice

Explanation: A retail financial planner can identify broad tax issues and explain elementary planning points, but should not give definitive advice on complex trust, offshore or undocumented arrangements. Here, several factors increase complexity: an offshore discretionary trust, a settlor who can benefit, possible appointments to beneficiaries, an offshore bond, business assets and an incomplete record of earlier loans and distributions. The correct professional response is to recognise the limits of elementary planning, avoid implementing a tax-driven recommendation, and involve a suitably qualified tax specialist before action is taken.

Treating trust appointments as simple potentially exempt transfers ignores the special rules for discretionary trusts and possible settlor-related tax issues.
Focusing only on the offshore bond chargeable event position is too narrow because CGT, IHT and trust-tax consequences may also arise.
Delaying until the next tax year is not a substitute for advice; it may change timing but does not resolve the underlying tax complexity.

The offshore discretionary trust, settlor-benefit position, asset appointments and incomplete history make the tax treatment too complex for elementary planning.

Question 33

Topic: Taxation of Direct and Indirect Investments

Priya is reviewing how to hold a proposed structured investment.

Client facts:

She is UK resident and domiciled, and is a higher-rate taxpayer.
She wants to invest £20,000 for six years in a FTSE-linked capital-at-risk structured investment.
The provider offers the same structured investment either unwrapped or inside a stocks and shares ISA.
She has made no ISA subscriptions in 2025/2026; her ISA allowance for the year is £20,000.
She expects to use her CGT annual exempt amount elsewhere this tax year.
She does not want additional investment risk for VCT, EIS, or SEIS reliefs.

What is the best recommendation from a tax-wrapper perspective?

A. Use a VCT wrapper because it gives tax relief without changing the investment risk profile.
B. Subscribe £20,000 to a stocks and shares ISA and hold the structured investment within the ISA.
C. Buy the structured investment directly because gains on structured products are always exempt from CGT.
D. Use an onshore investment bond because the 5% withdrawal facility makes all growth tax free.

Best answer: B

What this tests: Taxation of Direct and Indirect Investments

Explanation: When the same investment exposure is available inside an ISA and the client has enough unused ISA allowance, the ISA is usually the cleanest tax wrapper. Returns within an ISA are free of UK Income Tax and CGT, and Priya can cover the whole £20,000 investment with her 2025/2026 allowance. This is especially relevant because she is a higher-rate taxpayer and expects to use her CGT annual exempt amount elsewhere. The recommendation also respects her wish not to take on the additional qualifying-investment risks associated with venture capital schemes.

Direct unwrapped holding may expose any taxable gain or income to personal tax, and structured products are not automatically CGT-exempt.
An onshore investment bond can defer tax, but chargeable event gains are not tax free.
VCTs can offer tax relief, but they involve a different investment and risk profile rather than simply wrapping the chosen structured investment.

The ISA wrapper can shelter the structured investment return from Income Tax and CGT while using Priya’s available 2025/2026 allowance.

Question 34

Topic: Taxation of Direct and Indirect Investments

Oliver is reviewing a cash holding with his financial adviser for the 2025/2026 tax year.

Client facts:

He is an additional-rate taxpayer.
He holds £75,000 in an instant-access bank account outside an ISA.
The account is expected to pay £3,000 interest over the year.
He has already used his full ISA allowance for the tax year.
He expects to use the cash in eight months for a property purchase and wants capital security.

Which review focus is most appropriate?

A. Review the holding primarily for Income Tax, because the non-ISA interest will be taxable savings income for him.
B. No review is needed, because bank interest is exempt from Income Tax and National Insurance Contributions.
C. Review the holding primarily for wrapper choice, because he can subscribe the full £75,000 to a cash ISA immediately.
D. Review the holding primarily for wider suitability, because a short-term cash need normally makes equity investment more appropriate.

Best answer: A

What this tests: Taxation of Direct and Indirect Investments

Explanation: Interest from an ordinary bank or building society account is savings income for Income Tax purposes. Oliver is an additional-rate taxpayer, so his non-ISA savings interest needs review because it is not sheltered by an ISA and is expected to be taxable. Wrapper choice is less useful as the immediate focus because he has already used his full ISA allowance for the tax year, so he cannot simply move the whole balance into a cash ISA now. Wider investment suitability also does not point towards taking investment risk, as the money is needed in eight months and capital security is important. Deposit interest is not subject to NICs, but that does not remove the Income Tax issue.

A cash ISA review is limited because the current year ISA allowance has already been used.
Moving short-term property money into equity-based investments would conflict with the need for liquidity and capital security.
Saying no review is needed confuses NIC treatment with Income Tax treatment; ordinary deposit interest can still be taxable.

As an additional-rate taxpayer with no available ISA allowance, Oliver’s non-ISA deposit interest is the main personal-tax issue.

Question 35

Topic: Tax Impact, Planning, and Financial Affairs

Harriet, age 72, asks how best to help her adult daughter with a £100,000 house deposit now.

Relevant facts:

Harriet is UK resident and domiciled, and her estate is expected to exceed her available Inheritance Tax nil rate bands.
Her secure pension and rental income already covers her expenditure.
She wants to keep a £75,000 emergency cash reserve.
Her assets include £180,000 in taxable cash deposits, a £320,000 stocks and shares ISA, and a £500,000 flexi-access drawdown pension with beneficiary nominations to her children.
She is comfortable giving up access to £100,000 if it improves the family’s tax position.

Which action is most suitable?

A. Keep all assets invested and amend the will so the daughter receives an additional £100,000 on Harriet’s death.
B. Sell £100,000 of the stocks and shares ISA and give the proceeds to the daughter, leaving the taxable cash deposits intact.
C. Make an outright £100,000 gift from the taxable cash deposits and retain the pension and ISA investments, with the gift recorded as a potentially exempt transfer.
D. Withdraw £100,000 from the flexi-access drawdown pension and give the proceeds to the daughter, leaving the cash deposits intact.

Best answer: C

What this tests: Tax Impact, Planning, and Financial Affairs

Explanation: The best action compares immediate tax cash-flow with longer-term estate and investment effects. A withdrawal from taxable deposits does not itself create an Income Tax or CGT charge, and Harriet has enough cash to preserve her stated emergency reserve. An outright lifetime gift to her daughter is a potentially exempt transfer, so it can fall outside Harriet’s estate if she survives seven years. Keeping the pension invested is also tax-efficient in this context, as pension funds are generally outside the estate for IHT purposes on the 2025/2026 basis and a drawdown withdrawal could create Income Tax. Keeping the ISA preserves its tax-free investment wrapper.

Drawing £100,000 from the pension creates a likely Income Tax charge and removes funds from a comparatively IHT-efficient wrapper.
Selling ISA investments avoids CGT but sacrifices a tax-free wrapper when surplus taxable cash is available.
Relying on the will keeps the money in Harriet’s estate and does not improve the lifetime IHT position.

Using surplus cash avoids an immediate Income Tax or CGT charge while starting the seven-year period for IHT relief on the gift.

Question 36

Topic: Tax Impact, Planning, and Financial Affairs

Priya is considering a CGT planning suggestion in the 2025/2026 tax year.

Client facts:

Priya is a higher-rate taxpayer and has already used her CGT annual exempt amount.
She owns listed shares in a general investment account worth £84,000.
Her allowable cost for the shares is £54,000.
If Priya sells the shares herself, her CGT rate on the gain will be 20%.
Her adult daughter, Maya, has no income or gains and has her full £3,000 CGT annual exempt amount available. Any taxable share gains for Maya would be taxed at 10%.
Priya needs to keep control of the capital to fund a house purchase in six months.

Proposed planning action: Priya gifts the shares to Maya now so that Maya can sell them immediately using her exemption and lower CGT rate.

Assuming the value is unchanged when Maya sells, which conclusion is most accurate?

A. The plan is suitable because Maya would use her £3,000 exemption and pay CGT of £2,700, saving £3,300 compared with Priya selling the shares.
B. The plan is suitable because the gift is no gain/no loss, so Maya can sell the shares for £84,000 with no CGT.
C. The plan is unsuitable because Priya is treated as disposing of the shares for £84,000, creating a £30,000 gain and £6,000 CGT, while Maya would own the shares or proceeds.
D. The plan is unsuitable only if the shares rise before Maya sells them, because at an unchanged value there is no CGT for either person.

Best answer: C

What this tests: Tax Impact, Planning, and Financial Affairs

Explanation: For CGT, a gift of chargeable assets to someone other than a spouse or civil partner is normally treated as a disposal at market value. Priya is therefore taxed as if she sold the shares for £84,000. Her gain is £84,000 less £54,000, which is £30,000. As she has already used her annual exempt amount and her CGT rate is 20%, her CGT is £6,000. Maya’s base cost would be £84,000, so an immediate sale at the same value creates little or no gain for Maya. Her unused exemption and 10% rate do not shelter Priya’s existing gain. The proposal is also unsuitable because it gives Maya ownership of the shares or proceeds when Priya needs to retain control of the capital.

Applying Maya’s exemption and 10% rate to Priya’s built-in gain ignores the market value disposal by Priya.
No gain/no loss treatment is relevant to spouses and civil partners, not a straightforward gift to an adult child.
An unchanged sale price may mean no gain for Maya, but it does not remove Priya’s CGT charge or the family ownership consequence.

A gift to an adult child is treated as a market value disposal for CGT, and it would also transfer ownership away from Priya.

Question 37

Topic: Tax Impact, Planning, and Financial Affairs

Farah is considering how lifetime gifts can reduce the IHT payable by her adult children. She gave an investment portfolio to her son on 6 October 2025 and died 5 years and 2 months later.

IHT facts:

Value of portfolio when gifted: £500,000
Value the portfolio would have had at death if retained: £620,000
Other chargeable estate at death, before nil rate band: £600,000
Available annual exemptions to set against the gift: £3,000 for 2025/26 and £3,000 unused from 2024/25
Nil rate band: £325,000
IHT rate above the nil rate band: 40%
Taper relief for death 5 to 6 years after a gift: 60% reduction in tax on the failed PET
Ignore residence nil-rate band, spouse exemption, charitable exemption, and any other reliefs.

Compared with retaining the portfolio until death, how much IHT has the lifetime gift saved?

A. £50,400
B. £90,000
C. £90,960
D. £118,000

Best answer: C

What this tests: Tax Impact, Planning, and Financial Affairs

Explanation: The gift is a potentially exempt transfer. Because Farah died within seven years, it is brought back into the IHT calculation, but taper relief can reduce tax on the gift. The taxable PET is £494,000 after the two £3,000 annual exemptions. It uses the £325,000 nil rate band, leaving £169,000 chargeable at 40%, giving £67,600 before taper relief. A 60% taper reduction leaves £27,040 tax on the failed PET. The remaining estate of £600,000 has no nil rate band left, so estate IHT is £240,000. Total IHT with the gift is £267,040. If the portfolio had been retained, the estate would have been £1,220,000, so IHT would have been £358,000. The saving is therefore £90,960.

£50,400 leaves out taper relief on the failed PET.
£90,000 ignores the two annual exemptions, which reduce the failed PET tax by £960 after taper relief.
£118,000 compares only the estate tax position and ignores the IHT due on the failed PET.

Total IHT falls from £358,000 if the portfolio is retained to £267,040 with the failed PET, giving a saving of £90,960.

Question 38

Topic: UK Tax System for Individuals and Trusts

A paraplanner is reviewing a trust-income summary for the 2025/26 tax year.

Trust-income summary:

The settlor, Eleanor, created a discretionary trust in 2024.
The trust deed allows Eleanor’s spouse and adult daughter to benefit, but gives no beneficiary an automatic right to income.
The trustees received £9,000 of UK dividends and £2,000 of bank interest.
The trustees accumulated all the income and made no distributions in 2025/26.
Eleanor received no payments from the trust.

What is the best conclusion for the adviser to record?

A. The adult daughter is taxable on the income because she is a named beneficiary of the discretionary trust.
B. Only the trustees are taxable because the income was accumulated and no beneficiary received a payment.
C. No Income Tax consequence arises until the trustees make a distribution to a beneficiary.
D. Eleanor is treated as assessable on the trust income because her spouse can benefit from the settlement.

Best answer: D

What this tests: UK Tax System for Individuals and Trusts

Explanation: Where a settlement is settlor-interested, the settlor is treated as taxable on the trust income. This applies when the settlor, or the settlor’s spouse or civil partner, can benefit from the trust. The fact that the trust is discretionary and that no income has been distributed does not prevent the settlor-interested rules from applying. In this case, Eleanor’s spouse is within the class of potential beneficiaries, so Eleanor is the relevant person to consider for the Income Tax consequence on the trust income. A named discretionary beneficiary is not automatically taxed on income as it arises, because they have no fixed entitlement to it.

Accumulating the income does not avoid the settlor-interested trust rules.
A discretionary beneficiary is not taxed merely because they are named in the trust deed.
Waiting for an actual distribution is wrong where the settlor-interested rules already attribute the income to the settlor.

A trust is settlor-interested if the settlor or the settlor’s spouse or civil partner can benefit, so the settlor is treated as taxable on the income.

Question 39

Topic: Personal Taxation Applied to Investment Advice

A paraplanner is checking a 2025/2026 CGT calculation for a client who sold an OEIC holding outside an ISA. The asset is not residential property, and no special relief applies.

Computation facts:

The client’s taxable income for the year is £35,270.
The basic rate band is £37,700.
After deducting allowable costs, allowable capital losses and the £3,000 annual exempt amount, the taxable gain is £20,500.
CGT rates for this disposal are 18% on gains falling within any unused basic rate band and 24% on gains above that.

Which step correctly drives the CGT liability?

A. Tax £2,430 of the taxable gain at 18% and £18,070 at 24%, giving CGT of £4,774.20.
B. Tax the whole £20,500 taxable gain at 18%, giving CGT of £3,690.
C. Tax the whole £20,500 taxable gain at 24%, giving CGT of £4,920.
D. Add back the £3,000 annual exempt amount before applying the CGT rate split, giving CGT of £5,494.20.

Best answer: A

What this tests: Personal Taxation Applied to Investment Advice

Explanation: For an individual, taxable income is set against the basic rate band before capital gains are considered. The lower CGT rate applies only to the part of the taxable gain that fits within any unused basic rate band. Here, taxable income of £35,270 leaves £2,430 of the £37,700 basic rate band unused. The taxable gain is already stated after allowable deductions, losses and the annual exempt amount, so the rate split is applied to £20,500. CGT is therefore £2,430 at 18% (£437.40) plus £18,070 at 24% (£4,336.80), producing a liability of £4,774.20.

Taxing the whole gain at 18% ignores that only £2,430 of the basic rate band remains available.
Taxing the whole gain at 24% ignores the unused part of the basic rate band.
Adding back the annual exempt amount is wrong because the taxable gain has already been reduced by it before rates are applied.

The unused basic rate band is £2,430, so only that slice of the £20,500 taxable gain receives the 18% rate and the balance is charged at 24%.

Question 40

Topic: Tax Impact, Planning, and Financial Affairs

Leah is UK resident and expects employment income of £110,000 in 2025/26, with no other taxable income. She is considering a personal pension contribution using relief at source.

Use these tax-year facts:

Personal allowance: £12,570.
The personal allowance is reduced by £1 for every £2 of adjusted net income above £100,000.
Basic-rate band: £37,700.
Income Tax rates: 20% basic rate and 40% higher rate.
A gross personal pension contribution reduces adjusted net income and extends the basic-rate band by the gross contribution.
An £8,000 net payment is treated as a £10,000 gross pension contribution because the provider claims 20% basic-rate relief.
Ignore National Insurance and annual allowance issues.

If Leah pays £8,000 net into the pension, what is the total Income Tax relief generated, including the relief at source and the reduction in her self assessment liability?

A. £4,000
B. £6,000
C. £5,000
D. £2,000

Best answer: B

What this tests: Tax Impact, Planning, and Financial Affairs

Explanation: Before the pension contribution, Leah’s adjusted net income is £110,000, so her personal allowance is reduced by £5,000 to £7,570. Her tax is £7,540 on the basic-rate band and £25,892 at higher rate, totalling £33,432. After a £10,000 gross pension contribution, adjusted net income falls to £100,000, so the full £12,570 personal allowance is restored. The basic-rate band is also extended to £47,700. Her tax becomes £9,540 at basic rate and £19,892 at higher rate, totalling £29,432. The self assessment reduction is therefore £4,000. Adding the £2,000 basic-rate relief claimed by the provider gives total Income Tax relief of £6,000.

£2,000 counts only the basic-rate relief added by the pension provider.
£4,000 is the reduction in Leah’s own tax liability, but excludes the relief at source.
£5,000 confuses the amount of personal allowance restored with the tax value of that allowance.

The £10,000 gross contribution gives £2,000 relief at source and reduces Leah’s own tax liability by £4,000, giving total Income Tax relief of £6,000.

Question 41

Topic: Taxation of Direct and Indirect Investments

Amira, a UK-resident higher-rate taxpayer, has two UK onshore life assurance policies ending in 2025/26.

Her personal savings allowance has already been used.
Any taxable gain falls wholly within the higher-rate band, not the additional-rate band.
The basic rate is 20% and the higher rate is 40%.
A UK onshore policy gain is treated as having basic-rate tax paid.
No previous chargeable event gains have arisen.

Policy	Status and event	Premiums paid	Amount received	Previous withdrawals
Endowment	Certified qualifying; 20-year maturity	£36,000	£52,000	£0
Investment bond	Non-qualifying; full surrender	£80,000	£98,000	£6,000

How much additional Income Tax is payable in respect of these two policies for 2025/26?

A. £8,000
B. £3,600
C. £9,600
D. £4,800

Best answer: D

What this tests: Taxation of Direct and Indirect Investments

Explanation: A qualifying life policy that meets the qualifying rules normally pays out free of Income Tax and Capital Gains Tax, so the £16,000 profit on the endowment is ignored. A non-qualifying onshore life policy can produce a chargeable event gain. On full surrender, the gain is the surrender value plus previous withdrawals, less premiums paid and any previous gains already taxed. Here, the bond gain is £98,000 + £6,000 - £80,000 = £24,000. Because it is an onshore policy, basic-rate tax is treated as already paid. Amira is a higher-rate taxpayer, so the additional liability is the excess over basic rate: 40% - 20% = 20%. The additional Income Tax is therefore £24,000 × 20% = £4,800.

£3,600 leaves out the £6,000 previous withdrawals from the full surrender gain calculation.
£8,000 incorrectly taxes the qualifying policy profit as well as the non-qualifying bond gain.
£9,600 taxes the onshore bond gain at the full higher rate, ignoring basic-rate tax treated as paid.

The qualifying policy is exempt, and the non-qualifying onshore bond gain is £24,000, creating a 20% higher-rate excess liability of £4,800.

Question 42

Topic: Tax Impact, Planning, and Financial Affairs

Barbara, aged 70, wants to help her daughter with her granddaughter’s school fees for the next five years.

Client facts:

Net annual income: £112,000
Normal annual expenditure: £86,000
School fee support needed: £20,000 a year for five years
Barbara wants to keep her investment capital available and under her control.
Any extra value retained in her estate at death is expected to be taxed at 40% for IHT.

2025/2026 tax facts:

IHT annual exemption: £3,000 per tax year
Gifts out of normal expenditure can be immediately exempt if they are regular, made from income, and leave the donor enough income to maintain their normal standard of living.

Which recommendation best meets Barbara’s objectives and gives the correct approximate IHT saving compared with retaining the same funds in her estate?

A. Make a one-off £100,000 gift from her investment portfolio; it gives the same immediate exemption while keeping the capital available to Barbara.
B. Lend £100,000 interest-free to her daughter; because the money is used for school fees, the loan value is removed from Barbara’s estate.
C. Use only the £3,000 annual exemption each year; the IHT saving is about £6,000 over five years.
D. Pay £20,000 a year towards the school fees as a regular gift from surplus income; £100,000 should be immediately exempt and the IHT saving is about £40,000.

Best answer: D

What this tests: Tax Impact, Planning, and Financial Affairs

Explanation: The normal expenditure out of income exemption is often suitable where a client has surplus income, wants to support family members, and does not want to give away capital. Barbara’s surplus income is £112,000 less £86,000, or £26,000 a year. A planned £20,000 annual payment can therefore be made from income while leaving enough income to maintain her normal lifestyle. If the payments are regular and properly evidenced, the total paid over five years is £100,000 and can be immediately outside her estate for IHT. At a 40% marginal IHT rate, the approximate saving is £40,000. This route supports the family need without using investment capital or relying on seven-year survival.

Annual exemptions alone shelter only £15,000 over five years, saving about £6,000, and do not meet the £20,000 annual family need.
A one-off capital gift may become exempt after seven years, but it reduces Barbara’s capital and is not immediately exempt on the same basis.
A repayable loan remains an asset of Barbara’s estate, so it does not remove £100,000 for IHT purposes.

Barbara has £26,000 surplus income a year, so regular £20,000 gifts can meet the normal expenditure exemption and remove £100,000 from her estate at a 40% marginal IHT rate.

Question 43

Topic: Personal Taxation Applied to Investment Advice

Ravi is a UK-resident higher-rate taxpayer. He wants to raise £40,000 before 5 April 2026 from investments held outside ISAs and pensions, and asks for the disposal that will minimise immediate Capital Gains Tax.

2025/2026 tax facts and client position:

CGT annual exempt amount: £3,000.
Ravi has no unused basic-rate band, so taxable gains on these assets are taxed at 24%.
He has no current-year or brought-forward allowable losses.
He has not used his CGT annual exempt amount.
Ignore dealing costs.

Investment	Proceeds if sold	Allowable cost information
Global equity OEIC	£40,000	£35,000 confirmed
UK investment trust	£40,000	Original purchase contract note not yet obtained

Which recommendation is most appropriate at this stage?

A. Recommend selling the investment trust now, because a missing allowable cost means the taxable gain should be treated as nil.
B. Recommend selling £24,000 of the OEIC and £16,000 of the investment trust, because this keeps the OEIC gain within the £3,000 annual exempt amount.
C. Delay recommending which investment to sell until the investment trust’s allowable cost is confirmed; the OEIC CGT would be £480 but the comparison is incomplete.
D. Recommend selling the OEIC now, because its gain is £5,000 and the CGT charge is only £480.

Best answer: C

What this tests: Personal Taxation Applied to Investment Advice

Explanation: A disposal recommendation intended to minimise CGT must be based on the taxable result for each realistic disposal route. The OEIC calculation is known: proceeds of £40,000 less allowable cost of £35,000 gives a gain of £5,000. After Ravi’s £3,000 annual exempt amount, £2,000 is taxable at 24%, giving CGT of £480. The investment trust sale proceeds are known, but its allowable cost is not. Its disposal could produce a lower gain, a higher gain, or a loss. Until that cost is confirmed from contract notes, provider records, or other reliable evidence, the adviser cannot support a least-tax disposal recommendation.

Selling the OEIC uses confirmed figures, but it may not be the lowest-CGT route once the investment trust cost is known.
Treating an unknown allowable cost as nil is not appropriate tax planning; the cost must be established.
A mixed sale still depends on the investment trust’s unknown gain or loss, so it does not remove the missing fact problem.

The confirmed OEIC figures give CGT of £480, but the investment trust cannot be compared until its allowable cost is established.

Question 44

Topic: UK Tax System for Individuals and Trusts

Leah is reviewing four client actions that took place in 2025/26. Each asset was held outside an ISA or pension.

Which action is NOT treated as a disposal for Capital Gains Tax purposes?

A. Re-registering unit trust holdings from one investment platform nominee to another with no change in beneficial ownership.
B. Exchanging an antique painting for another collectible asset.
C. Gifting OEIC units to an adult child for no payment.
D. Selling listed company shares through a broker and receiving cash proceeds.

Best answer: A

What this tests: UK Tax System for Individuals and Trusts

Explanation: For CGT, a disposal normally occurs when a chargeable asset is sold, gifted, exchanged, or otherwise transferred so that beneficial ownership changes. A gift is still a disposal, even if no money is received, and the market value rule may apply. An exchange is also a disposal because the client gives up one asset in return for another. By contrast, moving the same holding between platform nominees, where the same client remains the beneficial owner throughout, is an administrative change rather than a CGT disposal.

Selling shares for cash is a standard CGT disposal.
Gifting OEIC units to an adult child changes beneficial ownership and is treated as a disposal.
Exchanging one collectible for another involves giving up an asset and is treated as a disposal.
Re-registering holdings between nominees without changing beneficial ownership does not create a CGT disposal.

A nominee re-registration with unchanged beneficial ownership is not a disposal for CGT purposes.

Question 45

Topic: UK Tax System for Individuals and Trusts

A UK-resident client sold a flat in December 2025 and asks for an estimate of the CGT due.

Known facts:

She bought the flat in May 2014 for £220,000 and paid acquisition costs of £3,000.
She sold it for £350,000 and paid sale costs of £5,000.
She was the sole legal and beneficial owner throughout.
She lived in the flat for a period before moving out and letting it.
Her losses, annual exempt amount, and Income Tax position are already known.

Which missing fact is most important before calculating the taxable gain for CGT purposes?

A. The exact dates when the flat was her only or main residence
B. The amount of mortgage debt repaid when the flat was sold
C. The rent received from the tenant in the final tax year
D. Whether the purchaser was liable to Stamp Duty Land Tax

Best answer: A

What this tests: UK Tax System for Individuals and Trusts

Explanation: For a residential property that has been both occupied by the owner and let, the gain starts with sale proceeds less allowable acquisition and disposal costs. The key unresolved point is then the period qualifying for private residence relief. Exact occupation dates are needed because the relief is normally time-apportioned over the ownership period, with any available final-period exemption added where the property has been the owner’s only or main residence. Mortgage repayment does not affect the CGT gain, SDLT paid by the buyer is irrelevant to the seller’s CGT computation, and rental income is dealt with under Income Tax rather than as part of the capital gain.

Mortgage debt affects sale proceeds available to the client, but it is not an allowable CGT deduction.
The buyer’s SDLT position does not alter the seller’s gain or reliefs.
Rent received may affect Income Tax, but it does not establish the private residence relief period.

These dates determine the amount of private residence relief, including any final-period relief, before the taxable gain can be calculated.

Question 46

Topic: UK Tax System for Individuals and Trusts

Marian, age 82, has a taxable estate well above her available nil rate bands. She wants to reduce potential Inheritance Tax but is unwilling to make outright gifts because she may need access to her capital.

Her adviser is considering an investment in shares expected to qualify for business relief. Assume:

Business relief would be 100% on the qualifying shares.
Relief is available only once the shares have been owned for at least two years.
The shares must still qualify when IHT is assessed.
The shares carry normal investment risk.

Which planning statement is most appropriate?

A. It may reduce the IHT value of the holding after two years while she retains ownership, provided the shares still qualify at death.
B. It only works if she gives the shares away and survives for seven years after the gift.
C. It removes the holding from her estate immediately on purchase, so later qualification is irrelevant.
D. It makes all income and capital gains from the shares tax-free for her beneficiaries.

Best answer: A

What this tests: UK Tax System for Individuals and Trusts

Explanation: Business relief can be used in elementary IHT mitigation where a client holds qualifying business property. In Marian’s case, the attraction is that she does not have to make an outright gift or rely on seven-year survival for a potentially exempt transfer. If the shares qualify, are held for the required two-year period, and remain qualifying at death, their IHT value may be relieved by 100%. The holding still belongs to Marian, so it is not removed from her estate in the same way as a completed gift; instead, its value is reduced for IHT purposes. The planning is not risk-free because the investment value can fall and the shares may cease to qualify.

Immediate estate removal is wrong because the shares must meet the ownership and qualification conditions.
Seven-year survival is not the key point here because business relief can apply to qualifying property held at death.
Income and capital gains are separate tax issues; business relief is an IHT relief, not a general tax-free wrapper.

Business relief can reduce the IHT value of qualifying business property while the client retains ownership, subject to the ownership period and continuing qualification.

Question 47

Topic: UK Tax System for Individuals and Trusts

A paraplanner is reviewing a simple discretionary trust created by a client’s will.

Relevant facts:

The trustees hold a portfolio of cash deposits and UK equities.
The trustees decide whether and when to distribute income.
One adult beneficiary has received an income distribution this tax year.
The trust is not settlor-interested.
A trustee says: “The beneficiary received the money, so the beneficiary must deal with all the tax and the trustees have no Income Tax role.”

What is the best response?

A. The trustees should ignore Income Tax unless all beneficiaries are higher-rate or additional-rate taxpayers.
B. The beneficiary alone is responsible for reporting and paying tax on the trust’s investment income because the beneficiary received a distribution.
C. The trustees must deal with the trust’s tax compliance and tax on trust income, while the beneficiary considers any personal Income Tax position on the distribution, normally taking account of the tax credit attached to it.
D. The executors of the deceased’s estate remain responsible for the annual Income Tax on trust income until the trust is wound up.

Best answer: C

What this tests: UK Tax System for Individuals and Trusts

Explanation: A trustee’s tax role is different from a beneficiary’s personal tax position. Trustees administer the trust, maintain records, submit any required trust tax returns, and account for tax due on trust income according to the type of trust. A beneficiary is concerned with the tax treatment of income received from, or entitlement under, the trust in their own tax affairs. In a discretionary trust, beneficiaries do not control the income before distribution, but an income distribution may still have to be reported personally and may carry a tax credit. The fact that a beneficiary receives money does not remove the trustees’ responsibility for the trust’s tax compliance.

Treating the beneficiary as solely responsible confuses receipt of a distribution with responsibility for the trust’s own tax affairs.
Trustee obligations do not depend on whether beneficiaries are basic-rate, higher-rate, or additional-rate taxpayers.
Executors deal with estate administration; once trust assets are held by trustees, ongoing trust income tax compliance rests with the trustees.

Trustees are responsible for the trust’s tax affairs, while beneficiaries are taxed according to their own position on distributions they receive or are entitled to.

Question 48

Topic: Personal Taxation Applied to Investment Advice

On 1 December 2025, Aisha transfers £500,000 into a discretionary trust. The trustees will pay any lifetime IHT. Aisha has no available annual exemptions for this transfer and no reliefs apply.

For 2025/2026, the nil rate band is £325,000 and lifetime IHT is charged at 20% on the excess over the available nil rate band when the trustees pay the tax.

Aisha’s earlier transfers were:

1 July 2018: £80,000 to a discretionary trust, chargeable value after exemptions £80,000.
1 March 2021: £120,000 to a discretionary trust, chargeable value after exemptions £120,000.
1 June 2023: £200,000 cash gift to her adult son, a potentially exempt transfer while she is alive.

What immediate lifetime IHT is payable on the December 2025 transfer?

A. £99,000
B. £59,000
C. £35,000
D. £75,000

Best answer: B

What this tests: Personal Taxation Applied to Investment Advice

Explanation: For an immediately chargeable lifetime transfer, earlier chargeable transfers made in the previous seven years reduce the nil rate band available for the new transfer. The 1 March 2021 discretionary trust transfer is within seven years of 1 December 2025, so it uses £120,000 of Aisha’s £325,000 nil rate band. The 1 July 2018 transfer is outside seven years and is ignored for this calculation. The 2023 gift to her son is a potentially exempt transfer while Aisha is alive, so it does not reduce the nil rate band for this immediate lifetime charge. The available nil rate band is £325,000 - £120,000 = £205,000. The taxable excess is £500,000 - £205,000 = £295,000. At 20%, the immediate lifetime IHT is £59,000.

£35,000 ignores the 2021 chargeable lifetime transfer within the seven-year cumulation period.
£75,000 incorrectly includes the 2018 chargeable transfer, which is outside seven years.
£99,000 incorrectly treats the 2023 potentially exempt transfer as reducing the nil rate band while Aisha is alive.

Only the £120,000 chargeable lifetime transfer within the previous seven years reduces the nil rate band, leaving £205,000 available and £295,000 taxable at 20%.

Question 49

Topic: UK Tax System for Individuals and Trusts

Mina is employed by a UK company and has Income Tax deducted from her salary through PAYE.

For 2025/2026 she also has:

rental profit from a buy-to-let property, with no tax deducted at source;
a chargeable gain from selling shares held outside an ISA;
no notice from HMRC requiring her to file a tax return.

She asks whether PAYE means she can take no further action. What is the best professional response?

A. She can rely on PAYE because it is designed to collect all Income Tax and Capital Gains Tax due from employees.
B. She only needs to contact HMRC if HMRC first issues a notice requiring her to file a tax return.
C. She should notify HMRC and file under self assessment so the untaxed income and gain can be declared and any tax due can be collected.
D. She can avoid self assessment if she reinvests the rental profit and share-sale proceeds before the end of the tax year.

Best answer: C

What this tests: UK Tax System for Individuals and Trusts

Explanation: PAYE collects tax from employment income, but it does not necessarily collect tax on other income or gains. Self assessment is the mechanism for individuals to notify HMRC of relevant taxable income or chargeable gains, declare them on a tax return, calculate the overall liability, and pay any tax not collected at source. Mina has rental profit and a chargeable gain outside an ISA, neither of which has been taxed through PAYE. The absence of an HMRC notice does not remove the need to notify HMRC if tax is due.

PAYE is not a complete substitute for self assessment where untaxed rental income or chargeable gains arise.
Waiting for HMRC to issue a return is unsafe because an individual may need to notify HMRC of chargeability.
Reinvesting proceeds does not, by itself, remove the need to report taxable income or chargeable gains.

Self assessment is used to report income or gains not fully dealt with at source and to calculate and collect the resulting tax.

Question 50

Topic: Taxation of Direct and Indirect Investments

Maya is UK resident and sells two offshore collective investments in the 2025/2026 tax year.

Investment facts:

Fund A has UK reporting fund status.
- Original cost: £42,000
- Sale proceeds: £52,000
Fund B does not have UK reporting fund status.
- Original cost: £30,000
- Sale proceeds: £42,000

Tax facts:

Ignore transaction costs, currency issues, distributions, and equalisation.
Maya has made no other capital disposals in the tax year.
Her full Capital Gains Tax annual exempt amount is available: £3,000.
Gains on collective investments above her basic-rate band are taxed at 20%.
Any offshore income gain is taxed at Maya’s marginal Income Tax rate of 40%.

What is the total UK tax liability arising from these two disposals?

A. £6,200
B. £3,800
C. £4,400
D. £8,800

Best answer: A

What this tests: Taxation of Direct and Indirect Investments

Explanation: A disposal of an offshore fund with UK reporting fund status is treated as a capital disposal, so Fund A gives a chargeable gain of £10,000. Maya can deduct her £3,000 annual exempt amount, leaving £7,000 taxable at 20%, giving CGT of £1,400. A disposal of a non-reporting offshore fund does not produce a normal capital gain. The £12,000 gain on Fund B is an offshore income gain and is taxed as income at Maya’s 40% marginal rate, giving £4,800. The total tax liability is therefore £1,400 + £4,800 = £6,200.

£3,800 treats both disposals as capital gains and incorrectly applies the annual exempt amount to the non-reporting fund gain.
£4,400 treats both disposals as capital gains and also overlooks the available annual exempt amount.
£8,800 treats both disposals as offshore income gains and denies CGT treatment for the reporting fund.

Fund A produces £1,400 of CGT and Fund B produces a £4,800 offshore income gain charge, making £6,200 in total.

Exam snapshot

Item	Detail
Issuer	Chartered Insurance Institute (CII)
Exam route	CII R03
Official exam name	CII R03 — Personal Taxation
Credential identity	CII means Chartered Insurance Institute; R03 is Personal Taxation.
Full-length set on this page	50 questions
Exam time	60 minutes
Topic areas represented	4

Full-length exam mix

Topic	Approximate official weight	Questions used
UK Tax System for Individuals and Trusts	30%	15
Taxation of Direct and Indirect Investments	30%	15
Tax Impact, Planning, and Financial Affairs	20%	10
Personal Taxation Applied to Investment Advice	20%	10

Continue in the web app

Use Finance Prep for interactive CII R03 practice with mixed sets, timed mock exams, topic drills, explanations, and progress tracking.

Focused topic pages

Practice next step

Use the full Finance Prep practice page above for the latest review links and practice page.

Tax and Advice

Official Resources

Free CII R03 Practice Exam: Personal Taxation

Practice questions

Questions 1-25

Question 1

Question 2

Question 3

Question 4

Question 5

Question 6

Question 7

Question 8

Question 9

Question 10

Question 11

Question 12

Question 13

Question 14

Question 15

Question 16

Question 17

Question 18

Question 19

Question 20

Question 21

Question 22

Question 23

Question 24

Question 25

Questions 26-50

Question 26

Question 27

Question 28

Question 29

Question 30

Question 31

Question 32

Question 33

Question 34

Question 35

Question 36

Question 37

Question 38

Question 39

Question 40

Question 41

Question 42

Question 43

Question 44

Question 45

Question 46

Question 47

Question 48

Question 49

Question 50

Exam snapshot

Full-length exam mix

Continue in the web app

Focused topic pages

Practice next step

Browse Certification Practice Tests by Exam Family