Free CII R03 Practice Questions: Taxation Applied to Advice

CII means Chartered Insurance Institute. R03 is Personal Taxation in the Diploma in Regulated Financial Planning. Use this focused CII R03 page as a short practice test for Taxation Applied to Advice. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CII questions, copied live-exam content, or exam dumps.

Topic snapshot

Sample questions

These are original Finance Prep practice questions aligned to this topic area. 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 topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Personal Taxation Applied to Investment Advice

Sana is a UK-resident individual checking her 2025/2026 Income Tax position. She has no other income, reliefs, or deductions.

Income and reliefs:

• Employment income after payroll deductions: £46,000
• Rental profit: £6,000
• Bank interest: £1,200
• Dividends: £3,800
• Personal pension contribution paid under relief at source: £3,200 net, treated as £4,000 gross

Tax facts to use:

• Personal Allowance: £12,570
• Basic-rate band: £37,700
• Gross relief-at-source pension contributions extend the basic-rate band but do not reduce taxable income.

What amount of Sana’s taxable income is covered by the basic-rate band for 2025/2026?

• A. £37,700
• B. £40,430
• C. £44,430
• D. £41,700

Best answer: D

What this tests: Personal Taxation Applied to Investment Advice

Explanation: Sana’s total income is £57,000: £46,000 employment income, £6,000 rental profit, £1,200 interest, and £3,800 dividends. Deducting the Personal Allowance of £12,570 gives taxable income of £44,430. A relief-at-source pension contribution does not reduce taxable income, but the gross contribution extends the basic-rate band. Her £3,200 net contribution is treated as £4,000 gross, so the basic-rate band becomes £37,700 + £4,000 = £41,700. Because her taxable income of £44,430 is higher than £41,700, the amount covered by the basic-rate band is £41,700.

• £37,700 ignores the extension to the basic-rate band from the gross pension contribution.
• £40,430 incorrectly deducts the gross pension contribution from taxable income.
• £44,430 is her total taxable income after the Personal Allowance, not the amount covered by the basic-rate band.

Her taxable income exceeds the extended basic-rate band, so the covered amount is £37,700 plus the £4,000 gross pension contribution.

Question 2

Topic: Personal Taxation Applied to Investment Advice

Harriet and Lee are spouses. Harriet wants to take one investment-related planning action before 5 April 2026 and wants the action with the largest combined 2025/26 tax saving for them as a couple.

Assume each action is otherwise suitable, no transaction costs apply, and the relevant income or gain arises in 2025/26 after the action is taken.

2025/26 tax facts to use:

• Savings interest: additional rate 45%, basic rate 20%; personal savings allowance £0 for additional-rate taxpayers and £1,000 for basic-rate taxpayers.
• Dividends: additional rate 39.35%, basic rate 8.75%; dividend allowance £500.
• Listed investment gains: additional/higher rate CGT 24%, basic rate CGT 18%; annual exempt amount £3,000.
• Transfers between spouses are on a no gain/no loss basis.
• ISA income and gains are tax-free.

Client profile:

• Harriet is an additional-rate taxpayer. Her dividend allowance and CGT annual exempt amount have already been used.
• Lee is a basic-rate taxpayer with enough unused basic-rate band for any one of the actions. His personal savings allowance, dividend allowance, and CGT annual exempt amount are unused.

Possible single actions:

• Put £20,000 of Harriet’s cash into a cash ISA. It will produce £900 interest.
• Transfer a deposit account to Lee. It will produce £1,200 interest.
• Transfer dividend shares to Lee. They will produce £1,600 dividends.
• Transfer a unit trust to Lee immediately before sale. The sale will realise a £9,000 gain.

Which action produces the largest combined tax saving for 2025/26?

• A. Transfer the deposit account to Lee.
• B. Transfer the dividend shares to Lee.
• C. Put £20,000 of Harriet’s cash into a cash ISA.
• D. Transfer the unit trust to Lee immediately before the sale.

Best answer: D

What this tests: Personal Taxation Applied to Investment Advice

Explanation: The strongest planning action is the one that produces the largest immediate combined tax reduction. If Harriet sells the unit trust herself, her annual exempt amount is already used, so the £9,000 gain is taxed at 24%, giving CGT of £2,160. A no gain/no loss transfer to Lee lets him sell with the same £9,000 gain, but he can use his £3,000 annual exempt amount and pay 18% on £6,000, giving CGT of £1,080. The tax saving is therefore £1,080. The other actions save less: the ISA saves £405 on £900 interest at 45%, the deposit transfer saves £500, and the dividend transfer saves £533.35.

• The dividend transfer is useful, but it reduces tax by £629.60 less £96.25, which is £533.35.
• The deposit transfer uses Lee’s personal savings allowance, but the saving is only £540 less £40, which is £500.
• The cash ISA shelters £900 of interest from Harriet’s 45% tax rate, saving £405.

Harriet would otherwise pay £2,160 CGT, while Lee would pay £1,080 after his annual exempt amount, giving the largest saving of £1,080.

Question 3

Topic: Personal Taxation Applied to Investment Advice

Amara is resident and domiciled in the UK. On 10 April 2025 she wants to settle cash into a discretionary trust for her grandchildren. Her priority is to place the largest possible amount into the trust without an immediate lifetime IHT charge, and she is willing to wait a few weeks.

Relevant facts:

• On 30 April 2018, she made a chargeable lifetime transfer of £120,000 after all available exemptions.
• She has made no other lifetime transfers.
• The nil rate band is £325,000.
• The annual exemption is £3,000 per tax year, and she has not used it for 2024/2025 or 2025/2026.

Which recommendation is most appropriate?

• A. Wait until after 30 April 2025 and then settle up to £445,000 into the trust.
• B. Settle only £205,000 immediately, as annual exemptions cannot be used for a discretionary trust.
• C. Wait until after 30 April 2025 and then settle up to £331,000 into the trust.
• D. Settle £331,000 immediately, as the 2018 transfer was made in an earlier tax year.

Best answer: C

What this tests: Personal Taxation Applied to Investment Advice

Explanation: A transfer into a discretionary trust is a chargeable lifetime transfer. For the immediate lifetime IHT calculation, chargeable transfers made in the previous seven years reduce the available nil rate band. On 10 April 2025, Amara’s 30 April 2018 transfer is still within that seven-year period, so it uses £120,000 of the £325,000 nil rate band. If she waits until after 30 April 2025, that transfer drops out of the cumulation period. She can then use the full nil rate band, plus the unused annual exemptions for 2024/2025 and 2025/2026, giving £325,000 + £6,000 = £331,000 without an immediate lifetime IHT charge.

• Settling £331,000 immediately fails because the 30 April 2018 transfer is still within the seven-year cumulation period on 10 April 2025.
• Limiting the immediate settlement to £205,000 ignores the available annual exemptions; £211,000 could be settled immediately without a lifetime charge.
• Settling £445,000 after the anniversary overstates the available relief; only the current nil rate band plus the two annual exemptions can be used.

After the earlier transfer falls outside the seven-year cumulation period, the full £325,000 nil rate band plus £6,000 annual exemptions can be used.

Question 4

Topic: Personal Taxation Applied to Investment Advice

Saira, a self-employed marketing consultant, is reviewing her March 2026 cash-flow plan with her adviser.

• Her expected 2025/26 taxable trading profit is £58,000 after allowable business expenses.
• She has no employment income.
• Income Tax has been reserved separately.
• She has £12,000 available for any National Insurance Contributions due on the profit and for a stocks and shares ISA subscription before 5 April 2026.
• For 2025/26, Class 4 National Insurance Contributions are 6% on the slice of self-employed profits above £12,570 and up to £50,270, and 2% on the slice above £50,270.

What is the best National Insurance conclusion for her cash-flow plan?

• A. No National Insurance reserve is needed, so she can make the full £10,000 ISA subscription from this cash.
• B. Reserve £2,416.60 for Class 4 National Insurance Contributions and limit the ISA subscription to £9,583.40 unless she uses other cash.
• C. Treat the ISA subscription as reducing her profit for National Insurance purposes and reserve Class 4 NICs only on the lower figure.
• D. Reserve £1,160 for National Insurance Contributions, being 2% of the full £58,000 profit, and proceed with the £10,000 ISA subscription.

Best answer: B

What this tests: Personal Taxation Applied to Investment Advice

Explanation: Self-employed trading profits are subject to Class 4 NICs, even where the client has no employment income. The calculation uses slices of profit, not the whole profit at one rate. Saira’s profits between £12,570 and £50,270 are £37,700, charged at 6%, giving £2,262. Her profits above £50,270 are £7,730, charged at 2%, giving £154.60. The total Class 4 NIC reserve is £2,416.60. Because Income Tax has been reserved separately and the £12,000 must cover both NICs and the ISA subscription, a full £10,000 ISA payment would leave only £2,000 for NICs. She should either reduce the ISA subscription or use other cash for the shortfall.

• Having no employment income removes employee Class 1 NICs, but it does not remove Class 4 NICs on self-employed profits.
• Applying 2% to the whole profit ignores the 6% main Class 4 band.
• An ISA subscription is made from personal cash and does not reduce trading profits for Class 4 NICs.

Class 4 NICs are £37,700 at 6% plus £7,730 at 2%, totalling £2,416.60, so only £9,583.40 remains from the £12,000 without using other cash.

Question 5

Topic: Personal Taxation Applied to Investment Advice

A financial adviser is reviewing a trainee’s 2025/2026 Income Tax estimate for Dr Shah.

Client facts:

• Taxable employment income before personal allowance: £104,000.
• Bank interest outside an ISA: £700 gross.
• Dividends outside an ISA: £9,000.
• Personal pension contribution paid under relief at source: £6,000 net, grossed up by the provider to £7,500.
• No Gift Aid donations or other taxable income.

Relevant tax-table points:

• Personal allowance is £12,570, reduced by £1 for every £2 of adjusted net income over £100,000.
• A gross relief-at-source pension contribution reduces adjusted net income and extends the basic-rate band.
• Income is taxed in the order: non-savings income, savings income, then dividends.

The trainee has used adjusted net income of £113,700, a personal allowance of £5,720, and an unextended basic-rate band of £37,700. What is the best amendment for the adviser to request?

• A. Deduct the £6,000 net pension contribution directly from employment income before applying the personal allowance.
• B. Apply the £500 dividend allowance before salary and interest so that more basic-rate band remains available.
• C. Increase the personal savings allowance to £1,000 because the pension contribution reduces adjusted net income.
• D. Recalculate using the £7,500 gross pension contribution to reduce adjusted net income and extend the basic-rate band.

Best answer: D

What this tests: Personal Taxation Applied to Investment Advice

Explanation: For a personal pension paid under relief at source, the provider gives basic-rate relief by grossing up the contribution. The tax calculation should then use the gross contribution, not the net payment, to reduce adjusted net income and extend the basic-rate band. Here, Dr Shah’s adjusted net income should be reduced by £7,500, which partly restores the personal allowance lost through the taper above £100,000. The same gross amount also extends the basic-rate band, affecting how much income is charged at higher rates. The pension payment is not deducted directly from employment income, and the ordering of income remains non-savings income, savings income, then dividends.

• Deducting £6,000 from employment income confuses relief at source with a direct income deduction.
• Increasing the savings allowance to £1,000 is not supported; the client remains within higher-rate territory after the adjustment.
• Applying the dividend allowance first would not preserve basic-rate band, because dividends are taxed after non-savings and savings income.

The omitted gross relief-at-source pension contribution changes both the personal allowance taper and the band available for higher-rate relief.

Question 6

Topic: Personal Taxation Applied to Investment Advice

Priya is reviewing her 2025/2026 Capital Gains Tax position with her adviser before deciding whether to sell any further investments.

Relevant facts:

• Taxable income after allowances: £30,000.
• Basic-rate band: £37,700.
• Gain on a share disposal: £22,000.
• Allowable investment loss in the same tax year: £5,000.
• Annual exempt amount: £3,000.
• Applicable CGT rates for these assets: 18% within the unused basic-rate band and 24% above it.

Which conclusion should be reported to the adviser?

• A. Her CGT is £3,618, because the £17,000 net gain after the loss is taxable before applying the annual exempt amount.
• B. Her CGT is £3,360, because the whole £14,000 taxable gain is charged at 24% once it is added above her taxable income.
• C. Her CGT is £2,898, with £7,700 of the taxable gain charged at 18% and £6,300 charged at 24%.
• D. Her CGT is £2,520, because the whole £14,000 taxable gain is charged at 18% after the annual exempt amount is deducted.

Best answer: C

What this tests: Personal Taxation Applied to Investment Advice

Explanation: For CGT, allowable capital losses are set against gains before deducting the annual exempt amount. Priya’s £22,000 gain is reduced by the £5,000 loss to £17,000, then by the £3,000 annual exempt amount to give a taxable gain of £14,000. CGT rates are then determined by stacking the taxable gain on top of taxable income. Her taxable income has used £30,000 of the £37,700 basic-rate band, leaving £7,700. Therefore £7,700 of the gain is taxed at 18% and the remaining £6,300 is taxed at 24%, giving CGT of £2,898.

• Charging the whole £14,000 at 18% ignores that only £7,700 of the basic-rate band remains after taxable income.
• Charging the whole £14,000 at 24% ignores the unused basic-rate band still available for part of the gain.
• Taxing £17,000 treats the annual exempt amount as unavailable, but it is deducted after same-year losses have been set against gains.

The same-year loss is deducted before the annual exempt amount, and only £7,700 of the £14,000 taxable gain falls within the unused basic-rate band.

Question 7

Topic: Personal Taxation Applied to Investment Advice

Maya is reviewing a planned transfer of an investment holding for CGT purposes in 2025/2026.

Client facts:

• Maya owns quoted shares personally, outside an ISA.
• She bought the shares for £35,000.
• Their current market value is £50,000.
• She intends to sell them to her adult son for £20,000.
• No incidental costs or CGT reliefs apply.

What is the best conclusion before considering Maya’s annual exempt amount or any capital losses?

• A. The disposal produces a gain of £30,000 because the market value is compared with the discounted sale price.
• B. The disposal is treated as taking place at market value and produces a chargeable gain of £15,000.
• C. The disposal produces an allowable loss of £15,000 because the actual sale proceeds are below the purchase cost.
• D. The disposal has no immediate CGT result because the transfer is between family members.

Best answer: B

What this tests: Personal Taxation Applied to Investment Advice

Explanation: For CGT, a disposal to a connected person is not normally calculated using the amount actually paid if that amount is below market value. The market value rule substitutes the asset’s open market value as the deemed disposal proceeds. Maya’s adult son is a connected person, so the disposal proceeds are treated as £50,000 rather than £20,000. Her allowable cost is £35,000 and there are no incidental costs or reliefs, giving a chargeable gain of £15,000 before considering the annual exempt amount or any available capital losses. A transfer between spouses or civil partners living together would normally be on a no gain/no loss basis, but that rule does not apply to a transfer from a parent to an adult child.

• Using the £20,000 actual sale price incorrectly ignores the connected person market value rule.
• A family transfer is not automatically tax neutral; the no gain/no loss rule is limited mainly to spouses and civil partners living together.
• Comparing market value with the discounted sale price measures the undervalue, not the CGT gain.

A sale to a connected person is treated as made at market value, so the gain is £50,000 less the £35,000 base cost.

Question 8

Topic: Personal Taxation Applied to Investment Advice

Harriet, a UK-resident individual, asks how her investment disposals in 2025/2026 will affect her CGT position.

Disposal summary:

• Gain on OEIC units: £14,000
• Gain on listed shares: £6,000
• Allowable loss on an investment trust holding: £4,500
• Unused allowable capital losses brought forward from earlier years: £15,000
• Annual exempt amount for 2025/2026: £3,000

No other CGT reliefs or exemptions apply. What is Harriet’s chargeable gain for 2025/2026, and how much of the brought-forward loss can she carry forward?

• A. Chargeable gain £0; brought-forward loss carried forward £2,500
• B. Chargeable gain £3,000; brought-forward loss carried forward £2,500
• C. Chargeable gain £2,500; brought-forward loss carried forward £0
• D. Chargeable gain £0; brought-forward loss carried forward £0

Best answer: A

What this tests: Personal Taxation Applied to Investment Advice

Explanation: Current-year allowable losses must be deducted from current-year gains before the annual exempt amount is applied. Harriet’s total gains are £20,000. After deducting the current-year loss of £4,500, her net gains are £15,500. Brought-forward capital losses are then used only to the extent needed to reduce the remaining gains to the annual exempt amount. Using £12,500 of the brought-forward losses reduces the gains to £3,000. The £3,000 annual exempt amount then shelters the rest, leaving no chargeable gain. Harriet therefore keeps £2,500 of the £15,000 brought-forward losses for future tax years.

• Using all £15,000 of brought-forward losses wastes part of the annual exempt amount unnecessarily.
• A £2,500 chargeable gain results from using all brought-forward losses and then applying the annual exempt amount incorrectly.
• A £3,000 chargeable gain treats the annual exempt amount as if it were not available to cover the remaining gains.

Current-year losses are set against current-year gains first, then brought-forward losses are used only as needed before applying the annual exempt amount.

Question 9

Topic: Personal Taxation Applied to Investment Advice

Harriet holds a quoted share portfolio outside an ISA or pension. She bought the shares for £20,000 including acquisition costs, and their current market value is £31,000.

She transfers the whole holding as an outright gift to her spouse, Lee. They are living together throughout the tax year, and Lee gives no consideration for the transfer.

Ignoring any annual exempt amount and any later sale by Lee, what is the Capital Gains Tax result for Harriet on the transfer?

• A. No immediate chargeable gain or allowable loss arises for Harriet.
• B. Harriet has a chargeable gain of £11,000 because the market value rule applies to gifts.
• C. Harriet has no disposal for Capital Gains Tax because the shares remain within the same household.
• D. Harriet has an allowable loss of £20,000 because she receives no sale proceeds.

Best answer: A

What this tests: Personal Taxation Applied to Investment Advice

Explanation: For Capital Gains Tax, a gift is usually a disposal, and connected-person rules can require market value to be used instead of actual proceeds. However, transfers between spouses or civil partners who are living together are normally treated on a no gain/no loss basis. This means Harriet is treated as disposing of the shares for an amount that gives neither a gain nor a loss, despite the increase in value from £20,000 to £31,000. Lee effectively takes over Harriet’s base cost for future CGT purposes, so any unrealised gain may be taxed if Lee later disposes of the shares outside a tax-free wrapper.

• The £11,000 market-value gain would be relevant for many gifts to connected persons, but the spouse no gain/no loss rule overrides it here.
• Receiving no consideration does not create a £20,000 allowable loss, because CGT does not simply compare proceeds with cost in this situation.
• The transfer is still a disposal for CGT purposes; it is just treated as producing neither a gain nor a loss immediately.

A transfer between spouses living together is normally treated on a no gain/no loss basis for Capital Gains Tax.

Question 10

Topic: Personal Taxation Applied to Investment Advice

Helen is a higher-rate taxpayer and holds an unwrapped UK equity fund worth £24,000. Her original acquisition cost was £22,000.

2025/2026 position:

• She has made no other chargeable disposals.
• The CGT annual exempt amount is £3,000.
• She has already used her dividend allowance.
• She has not used any of her £20,000 ISA allowance.

Helen wants to keep broadly the same investment exposure for the long term and does not need the money for spending. What is the most suitable tax-efficient action?

• A. Sell the whole holding and repurchase it outside an ISA after 30 days to reset the base cost.
• B. Gift the fund to her adult child so that future dividends are taxed on the child instead.
• C. Switch the whole holding into VCT shares to make future dividends tax-free.
• D. Sell £20,000 of the fund and repurchase it within a stocks and shares ISA.

Best answer: D

What this tests: Personal Taxation Applied to Investment Advice

Explanation: A bed-and-ISA transaction is a straightforward way to improve tax efficiency where an investor wants to keep similar market exposure but currently holds funds outside a tax wrapper. Selling £20,000 of the holding would crystallise only a proportionate gain. Here, the total unrealised gain is £2,000, so a £20,000 disposal creates a gain of about £1,667, which is covered by the £3,000 CGT annual exempt amount. Once repurchased within the ISA, future dividends and capital gains on that amount are free of Income Tax and CGT. This fits Helen’s objective because it uses her unused ISA allowance without materially changing the investment strategy.

• Repurchasing outside an ISA may reset some base cost, but it does not shelter future dividends or gains.
• Gifting to an adult child would normally be a CGT disposal at market value and would mean Helen gives up ownership and control.
• VCTs can offer tax advantages, but they introduce a very different and higher-risk investment exposure.

The part disposal creates a gain within her CGT annual exempt amount and shelters future income and gains inside the ISA.

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.

Related focused pages

• Free CII R03 Practice Exam: Personal Taxation
• Free CII R03 Practice Questions: UK Tax System
• Free CII R03 Practice Questions: Investment Taxation
• Free CII R03 Practice Questions: Tax Planning and Financial Affairs

Practice next step

Use the Finance Prep web app above when you want interactive practice beyond this static page.