Free CII R03 Practice Questions: UK Tax System

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 UK Tax System. 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.

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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: UK Tax System for Individuals and Trusts

Leah is UK resident and UK domiciled. She is reviewing three transfers for Inheritance Tax purposes:

• She gives £60,000 outright to her adult daughter.
• She settles £90,000 cash into a discretionary trust for her grandchildren.
• On her later death, £150,000 passes under her will to her brother.

Assume no spouse or civil partner exemption, charity exemption, annual exemption, or nil rate band calculation is relevant to the classification. Which statement correctly classifies the transfers?

• A. The gift to her daughter is a potentially exempt transfer; the settlement into the discretionary trust is a transfer at death; the legacy under her will is a chargeable lifetime transfer.
• B. The gift to her daughter is a transfer at death; the settlement into the discretionary trust is a chargeable lifetime transfer; the legacy under her will is a potentially exempt transfer.
• C. The gift to her daughter is a chargeable lifetime transfer; the settlement into the discretionary trust is a potentially exempt transfer; the legacy under her will is a transfer at death.
• D. The gift to her daughter is a potentially exempt transfer; the settlement into the discretionary trust is a chargeable lifetime transfer; the legacy under her will is a transfer at death.

Best answer: D

What this tests: UK Tax System for Individuals and Trusts

Explanation: For Inheritance Tax, the nature of the recipient and the timing of the transfer are key. An outright lifetime gift to another individual is normally a potentially exempt transfer. It is not immediately chargeable to IHT, but may become chargeable if the donor dies within seven years. A lifetime transfer into a discretionary trust is normally a chargeable lifetime transfer, so it is within the IHT charge when made, subject to available exemptions and the nil rate band. Assets passing under a will, or otherwise on death, are not PETs or CLTs because those terms apply to lifetime transfers. They are transfers at death and are assessed as part of the death estate.

• Treating the outright gift to the daughter as a chargeable lifetime transfer confuses gifts to individuals with transfers into most discretionary trusts.
• Treating the discretionary trust settlement as a potentially exempt transfer ignores the special IHT treatment of relevant property trusts.
• Classifying the will legacy as a PET or CLT is incorrect because those categories apply to lifetime transfers, not property passing on death.

An outright lifetime gift to an individual is a PET, a lifetime settlement into a discretionary trust is normally a CLT, and property passing under a will is a transfer at death.

Question 2

Topic: UK Tax System for Individuals and Trusts

An adviser is checking a 2025/2026 Income Tax computation for Maya, who lives in England and has no other income. Her personal allowance has already been fully set against her employment income.

For banding purposes, use a basic-rate band of £37,700. The issue is only which parts of the income use that band before applying the relevant Income Tax rates, including any nil rates for savings or dividends.

• Employment income (non-savings): £35,000
• Bank interest (savings): £4,000
• Dividends: £6,000

What is the best conclusion about how Maya’s income should be ordered for tax banding?

• A. Tax the £35,000 employment income first, then £2,700 of the interest within the basic-rate band; the remaining £1,300 interest and all £6,000 dividends fall above the basic-rate band.
• B. Tax the interest first because savings income has its own rates, leaving £33,700 of employment income within the basic-rate band.
• C. Tax the dividends before the interest, so £2,700 of dividends and all the interest use the remaining basic-rate band.
• D. Apportion the £37,700 basic-rate band across employment income, interest, and dividends in proportion to their amounts.

Best answer: A

What this tests: UK Tax System for Individuals and Trusts

Explanation: For Income Tax banding, income is not ordered by tax efficiency and the basic-rate band is not apportioned. The normal priority is non-savings income first, savings income second, and dividend income last. With the personal allowance already dealt with, Maya’s £35,000 employment income uses the first £35,000 of the £37,700 basic-rate band. This leaves £2,700. Her savings interest is considered next, so £2,700 of the £4,000 interest is within the basic-rate band and £1,300 falls above it. Dividends are taxed last, so none of the £6,000 dividend income can use the basic-rate band. Savings and dividend nil rates may affect the tax payable, but they do not alter this stacking order.

• Taxing dividends before interest reverses the priority order; dividends are normally the top slice of income.
• Taxing savings income before employment income ignores the rule that non-savings income is considered first.
• Proportionate allocation is not used; income categories are stacked in a set sequence for banding.

Non-savings income is taxed first, savings income second, and dividend income last, so the remaining basic-rate band is used by savings income before dividends.

Question 3

Topic: UK Tax System for Individuals and Trusts

In the 2025/2026 tax year, Priya, aged 42, has the following income and benefits:

• She is employed by Beacon Ltd and receives a salary above the relevant National Insurance thresholds.
• Beacon Ltd provides her with a taxable company car.
• She also runs a separate sole-trader consultancy with trading profits above the relevant National Insurance thresholds.
• She receives dividends from a share portfolio and rental income from a buy-to-let property, but the letting is not run as a trade.

Which statement correctly describes the potential National Insurance Contributions liabilities?

• A. Priya may have employee Class 1 liability on her salary and self-employed Class 4 liability on her trading profits, while Beacon Ltd may have employer liability on her salary and taxable benefit.
• B. Priya’s dividends and rental income are treated as earnings for National Insurance because they are taxable income.
• C. Priya’s self-employed trading profits are ignored for National Insurance because she already pays National Insurance through PAYE employment.
• D. Beacon Ltd’s employer National Insurance is deducted from Priya’s gross pay and replaces her own employee National Insurance liability.

Best answer: A

What this tests: UK Tax System for Individuals and Trusts

Explanation: National Insurance is charged by reference to the nature of the income or activity, not simply because an amount is taxable. Salary from employment can give rise to employee Class 1 primary contributions and employer Class 1 secondary contributions. Taxable employment benefits, such as a company car, may create an employer NIC liability, commonly through Class 1A. A person who is both employed and self-employed can have separate NIC liabilities in each capacity, so Priya’s sole-trader profits may also be within Class 4. Dividends and passive property income are generally outside National Insurance, even though they may be subject to Income Tax.

• Dividends and passive rental income are not employment earnings or self-employed trading profits for NIC purposes.
• Having PAYE employment does not automatically remove NIC liability on a separate self-employed trade.
• Employer NIC is the employer’s liability and does not replace the employee’s own Class 1 primary liability.

Employment earnings can create Class 1 liabilities, taxable employment benefits can create employer NIC liability, and self-employed trading profits can create Class 4 liability.

Question 4

Topic: UK Tax System for Individuals and Trusts

Amira is UK resident and sold a buy-to-let flat in England during 2025/2026. The flat has never been her main residence.

Disposal facts:

• Completion date: 12 August 2025
• After allowable costs and the annual exempt amount, a Capital Gains Tax liability will arise.
• Amira already files a self assessment tax return each year.

She asks whether the gain can simply be dealt with when she files her 2025/2026 self assessment return. Which compliance point should be raised first?

• A. She must submit a UK property return and pay an estimate of the CGT within 60 days of completion.
• B. She should ask HMRC to collect the CGT through her PAYE code for 2025/2026.
• C. She can wait until 31 January 2027 because she already completes self assessment returns.
• D. She only needs to notify HMRC by 5 October 2026 and then wait for a tax demand.

Best answer: A

What this tests: UK Tax System for Individuals and Trusts

Explanation: UK residential property disposals with a Capital Gains Tax liability have an accelerated compliance requirement. A UK resident disposing of UK residential property must normally file a UK property return and pay an estimated CGT liability within 60 days of completion. This is separate from the normal self assessment timetable. If the individual also files a self assessment return, the disposal is still included on that return, but the earlier property reporting and payment requirement is not postponed until 31 January following the tax year.

• Waiting until 31 January 2027 confuses the self assessment balancing payment date with the accelerated UK residential property CGT deadline.
• The 5 October notification rule does not replace the 60-day UK property reporting requirement where CGT is due.
• PAYE coding is not the normal method for collecting CGT on a residential property disposal.

A UK resident with CGT due on a UK residential property disposal must normally report and pay within 60 days of completion.

Question 5

Topic: UK Tax System for Individuals and Trusts

A paraplanner is reviewing Neelam’s 2025/2026 tax position. She has a PAYE salary from her main employer and also received £18,000 from Brightfield Ltd for weekend project work. The file describes the £18,000 only as “consultancy income” and shows the gross amount received.

Before deciding the National Insurance treatment of the £18,000, which missing fact is needed first?

• A. Whether Neelam has any unused Personal Allowance for Income Tax
• B. Whether Neelam has realised any capital losses in 2025/2026
• C. Whether Neelam plans to use her ISA allowance for the tax year
• D. Whether the £18,000 is employment earnings or profits from self-employment

Best answer: D

What this tests: UK Tax System for Individuals and Trusts

Explanation: National Insurance treatment starts by identifying the nature of the earnings and the client’s employment status for the work. If the Brightfield Ltd payments are earnings from an employment or directorship, employee and employer Class 1 NIC rules may be relevant. If they are profits from a self-employed trade, the self-employed NIC rules are considered instead. The label “consultancy income” is not enough on its own, because a person can be described as a consultant while still being an employee for tax and NIC purposes. Income Tax allowances, ISA planning, and capital losses may affect other areas of personal taxation, but they do not establish which NIC regime applies to the £18,000.

• Personal Allowance affects Income Tax, not the initial classification of earnings for NIC purposes.
• ISA use may be relevant to investment-tax planning, but it does not determine NIC on work-related income.
• Capital losses are relevant to CGT and do not decide whether work payments are employment earnings or self-employed profits.

NIC treatment depends first on employment status, because employment earnings and self-employed profits are dealt with under different NIC classes.

Question 6

Topic: UK Tax System for Individuals and Trusts

A self-employed electrician is preparing his self assessment records.

Facts:

• He has given his accountant details of all invoiced work paid into his business bank account.
• He also received £9,000 in cash for weekend jobs.
• He issued no invoices for the cash jobs, kept the money at home, and says he will not tell his accountant because “HMRC will not see it”.

How should this conduct be characterised for UK tax compliance purposes?

• A. A careless self assessment error, because the cash was not paid into the business bank account.
• B. Tax avoidance, because he has arranged for customers to pay in cash rather than by bank transfer.
• C. Tax evasion, because he is deliberately concealing taxable trading income from his tax return.
• D. Legitimate tax planning, because uninvoiced cash receipts are outside the formal business records.

Best answer: C

What this tests: UK Tax System for Individuals and Trusts

Explanation: Tax evasion is illegal and involves dishonest conduct intended to reduce or escape tax, such as suppressing income, creating false records, or deliberately giving incomplete information to HMRC or an accountant. The decisive facts are that the electrician knows the £9,000 relates to taxable trading work and intends to keep it out of his self assessment return. Paying in cash does not change the tax treatment of trading income. Tax avoidance normally involves using arrangements to reduce tax while disclosing the relevant facts, although some avoidance schemes may be challenged. Here the conduct is not a disclosed planning arrangement; it is deliberate concealment.

• Describing the conduct as avoidance understates the issue: the problem is not merely the form of payment, but the planned omission of taxable income.
• Treating the cash as legitimate planning is wrong because trading receipts remain taxable even if no invoice was issued.
• Calling it careless is not supported because he intends not to disclose the income.

Deliberately omitting known taxable receipts from self assessment is dishonest concealment and is tax evasion.

Question 7

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 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.
• B. The trustees should ignore Income Tax unless all beneficiaries are higher-rate or additional-rate taxpayers.
• C. The beneficiary alone is responsible for reporting and paying tax on the trust’s investment income because the beneficiary received a distribution.
• 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: A

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 8

Topic: UK Tax System for Individuals and Trusts

Nadia is unsure whether she will be UK resident for 2025/2026 under the Statutory Residence Test. She wants advice on whether to sell a share portfolio before her residence position is clear.

Proposed disposal:

• Asset: listed shares held outside an ISA, not connected with UK land.
• Sale proceeds: £140,000.
• Allowable cost: £60,000.
• Allowable capital losses available: £5,000.
• She has no other chargeable gains in 2025/2026.
• If she is UK resident, her taxable income will have fully used the basic rate band.
• CGT annual exempt amount: £3,000.
• CGT rate on this gain if UK resident: 24%.
• If she is non-UK resident, no UK CGT will arise on this disposal, and temporary non-residence rules do not apply.

Which statement best quantifies how the residence uncertainty should affect the recommendation?

• A. Defer or clearly qualify the sale recommendation, because the UK-resident outcome is £17,280 more costly than the non-resident outcome.
• B. Proceed with the sale, because the UK-resident outcome is only £720 more costly after the annual exempt amount.
• C. Defer only if the sale proceeds exceed £140,000, because residence status alone does not create a CGT planning risk.
• D. Proceed with the sale, because both residence outcomes produce UK CGT of £17,280 on the share disposal.

Best answer: A

What this tests: UK Tax System for Individuals and Trusts

Explanation: Residence status can materially change the tax cost of an investment disposal. If Nadia is UK resident, the gain is sale proceeds of £140,000 less allowable cost of £60,000, giving £80,000. After deducting £5,000 capital losses and the £3,000 annual exempt amount, the taxable gain is £72,000. At 24%, the CGT is £17,280. Under the stated non-resident assumption, no UK CGT arises on this disposal. The advice should therefore not treat the sale as tax-neutral while residence is uncertain. A suitable recommendation would either defer the sale until the residence position is clearer or clearly explain the potential £17,280 UK tax exposure.

• Taxing only the annual exempt amount at 24% confuses the exemption with the taxable gain.
• Assuming both outcomes create the same UK CGT ignores the stated non-resident treatment for this type of asset.
• Focusing only on sale proceeds misses the key issue: CGT is based on the chargeable gain, and residence determines whether UK CGT applies.

The taxable gain if UK resident is £72,000, giving CGT of £17,280, while the stated non-resident outcome produces no UK CGT.

Question 9

Topic: UK Tax System for Individuals and Trusts

Ravi sells a house in June 2025 that was once his only or main residence. He is UK resident and has no other gains or losses in 2025/26.

Disposal details:

• Sale proceeds: £420,000
• Incidental sale costs: £6,000
• Original purchase price: £240,000
• Allowable enhancement expenditure: £14,000
• Total ownership period: 160 months
• Period occupied as his only or main residence: 100 months
• The final 9 months of ownership qualify for private residence relief in addition to the period of occupation.

Use these 2025/26 figures:

• Annual exempt amount: £3,000
• Residential property CGT rate: 18% within the unused basic rate band; 24% above that
• Ravi has £12,000 of unused basic rate band available after his taxable income

What is Ravi’s CGT liability on the disposal?

• A. £12,240
• B. £36,960
• C. £11,520
• D. £10,800

Best answer: D

What this tests: UK Tax System for Individuals and Trusts

Explanation: The initial gain is £160,000: £420,000 sale proceeds less £6,000 sale costs, £240,000 purchase cost and £14,000 enhancement expenditure. Private residence relief applies for 109 months: 100 months of occupation plus the final 9 months. The relief is £160,000 × 109/160 = £109,000, leaving £51,000. After the £3,000 annual exempt amount, the taxable gain is £48,000. Ravi has £12,000 of unused basic rate band, so £12,000 is taxed at 18% (£2,160) and the remaining £36,000 is taxed at 24% (£8,640). Total CGT is £10,800.

• £11,520 taxes the whole £48,000 taxable gain at 24%, so it misses the unused basic rate band.
• £12,240 ignores both the annual exempt amount and the available basic rate band.
• £36,960 gives no private residence relief, even though 100 months of occupation and the final 9 months qualify.

The gain after private residence relief is £51,000, reduced by the £3,000 annual exempt amount and taxed £12,000 at 18% and £36,000 at 24%.

Question 10

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 salary and the ordinary bank deposit interest only.
• C. The salary, ordinary bank deposit interest and cash ISA interest only.
• D. The ordinary bank deposit interest, cash ISA interest and Premium Bond prize only.

Best answer: B

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.

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Related focused pages

• Free CII R03 Practice Exam: Personal Taxation
• Free CII R03 Practice Questions: Investment Taxation
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• Free CII R03 Practice Questions: Taxation Applied to Advice

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