Free CISI IRT Practice Questions: Taxation of Investors and Investments

Use this focused CISI IRT page as a short practice test for Taxation of Investors and Investments. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

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Sample questions

These are original Finance Prep practice questions aligned to this topic area. They are not official CISI 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: Taxation of Investors and Investments

Which statement correctly summarises the UK income tax treatment of individuals, trusts, and charities?

• A. Trust income is always taxed only on the beneficiaries; charities are exempt from capital gains tax but not income tax.
• B. Individuals are taxed on taxable income after available allowances; trust income is taxed according to the type of trust and beneficiary rights; charities are generally exempt on income applied to charitable purposes.
• C. Individuals lose all personal allowances if they receive trust income; charities reclaim all income tax solely through Gift Aid.
• D. Individuals and trustees are taxed in the same way; charities pay income tax on all investment income but not on trading income.

Best answer: B

What this tests: Taxation of Investors and Investments

Explanation: UK income tax is applied by reference to the person or body receiving the income. Individuals are taxed on income after any available allowances and reliefs, using the appropriate income tax bands. Trust taxation depends on the trust structure and the beneficiaries’ rights to income, so the treatment of a bare trust, interest in possession trust, or discretionary trust can differ. Charities are treated differently again: income is generally exempt from income tax if it is applied for charitable purposes and the relevant charity tax conditions are met. The key point is that there is no single uniform income tax rule for individuals, trusts, and charities.

• Treating individuals and trustees identically ignores the separate trust rules and beneficiary-rights analysis.
• Saying trust income is always taxed only on beneficiaries is too broad, especially for discretionary trust structures.
• Gift Aid is important for charities, but it is not the sole basis for charity income tax relief.

UK income tax treatment differs by taxpayer status, with individuals, trusts, and charities each subject to distinct rules.

Question 2

Topic: Taxation of Investors and Investments

When determining a UK private individual’s income-tax liability, the personal allowance is deducted first where available. The remaining taxable income is then divided into slices, with each slice charged at the percentage set for that slice. Which term matches those slices of taxable income?

• A. Income tax bands
• B. Personal allowance
• C. National Insurance contributions
• D. Tax deducted at source

Best answer: A

What this tests: Taxation of Investors and Investments

Explanation: A private individual’s income-tax liability is determined by moving from income to taxable income and then applying the relevant rates. The personal allowance, where available, reduces the amount of income that is subject to income tax. Once taxable income has been established, it is allocated across income tax bands. Each band represents a slice of taxable income, and the tax rate for that band is applied only to income falling within that slice. This is why a higher rate generally applies to the next slice of income rather than to all income from the first pound.

• A personal allowance reduces taxable income before rates are applied; it is not the slice to which a rate is applied.
• Tax deducted at source is a payment mechanism or credit against liability, not the structure used to divide taxable income.
• National Insurance contributions are separate from income tax and are not income tax bands.

Income tax bands divide taxable income into slices so the appropriate rate can be applied to each slice.

Question 3

Topic: Taxation of Investors and Investments

An adviser is completing the tax-review stage of a fact-find. The client receives a salary from an employer, runs a small sole-trader consultancy that employs one part-time administrator, has annual trading profits, and has been told there is a gap in her National Insurance record. She asks whether this affects the tax planning before any wrapper recommendations are made.

What is the best next step in reviewing her National Insurance Contributions?

• A. Separate salary, staff wages, trading profits, and the NI-record gap, then identify the relevant employee, employer, self-employed, and voluntary NIC classes.
• B. Apply NIC to all taxable receipts, including salary, profits, dividends, interest, and gains, before selecting wrappers.
• C. Deduct all employer NIC from the client’s salary and treat the consultancy profits as outside NIC because they are business income.
• D. Select the ISA and pension contributions first, then review voluntary NIC only if unused allowances remain.

Best answer: A

What this tests: Taxation of Investors and Investments

Explanation: NIC review should start by categorising the income or contribution basis and who is liable. Employee Class 1 primary contributions are based on employment earnings and are an employee liability. Employer contributions are a separate employer liability based on employees’ pay, and certain benefits may also create employer NICs. A sole trader’s NIC position is considered separately, by reference to self-employed status and trading profits under the self-employed classes. Voluntary contributions, commonly Class 3, are considered in relation to gaps in the individual’s contribution record, not as a charge on investment income. The correct workflow is to split the facts into salary, staff pay, sole-trader profits, and record gaps, then decide which NIC class and payer applies to each.

• Applying NIC to all taxable receipts is too broad because investment income and capital gains are not simply pooled with earnings for NIC.
• Deducting employer NIC from salary confuses the employer’s separate liability with the employee’s primary contribution.
• Choosing wrappers first skips the tax classification step needed to judge whether NIC planning or voluntary contributions are relevant.

NICs are reviewed by identifying the income or contribution basis and the person or business liable before moving to product recommendations.

Question 4

Topic: Taxation of Investors and Investments

A client will invest £20,000 in a general investment account and is comparing two LSE-listed ways to obtain UK equity exposure: buying shares in a UK-incorporated investment trust or buying a qualifying exchange traded fund (ETF). Ignoring commission and the PTM levy, which comparison of UK Stamp Duty/SDRT on the purchase is correct?

• A. Neither purchase would normally be subject to Stamp Duty/SDRT because stamp taxes apply only to physical share certificates.
• B. The investment trust purchase would normally be subject to 0.5% SDRT; the qualifying ETF purchase would normally be exempt.
• C. The ETF purchase would normally be subject to 0.5% SDRT; the investment trust purchase would normally be exempt because it is a collective fund.
• D. Both purchases would normally be subject to 0.5% SDRT because both are traded on the London Stock Exchange.

Best answer: B

What this tests: Taxation of Investors and Investments

Explanation: UK stamp tax depends on the legal nature of the security being bought, not only on the investment exposure. A purchase of shares in a UK-incorporated company, including an investment trust, is normally within the Stamp Duty/SDRT regime. Where the purchase is settled electronically, SDRT at 0.5% is the usual charge. A qualifying ETF is treated differently and is normally exempt from UK Stamp Duty/SDRT on purchase. This means two products giving similar market exposure can have different stamp tax outcomes. The same principle explains why gilts and qualifying corporate bonds are generally exempt, while ordinary UK shares are generally chargeable.

• Trading on the London Stock Exchange does not automatically make every security chargeable; qualifying ETFs have a stamp-tax exemption.
• Describing an investment trust as a pooled investment does not remove the fact that it is bought as company shares.
• Electronic settlement does not remove the charge on UK shares; it generally means SDRT applies rather than paper Stamp Duty.

A UK investment trust is bought as company shares, whereas qualifying ETFs are normally exempt from UK Stamp Duty/SDRT on purchase.

Question 5

Topic: Taxation of Investors and Investments

Priya has the following income for a tax year. She is UK resident, has no other income or reliefs, and is entitled to the basic-rate personal savings allowance.

• Employment income: £16,000
• Interest from an ordinary bank account: £6,000
• Interest from a Cash ISA: £600
• Personal allowance: £12,570, set against non-savings income first
• Starting rate for savings: 0% on up to £5,000 of savings income, reduced £1 for £1 by non-savings income above the personal allowance
• Personal savings allowance for a basic-rate taxpayer: £1,000 at 0%
• Savings income not covered by 0% bands is taxed at 20%

How much income tax is payable on Priya’s savings income for the tax year?

• A. £806
• B. £1,200
• C. £1,000
• D. £686

Best answer: D

What this tests: Taxation of Investors and Investments

Explanation: Priya’s employment income uses her £12,570 personal allowance, leaving £3,430 of non-savings income above the allowance. This reduces the £5,000 starting rate for savings to £1,570. The Cash ISA interest is exempt from income tax, so only the £6,000 ordinary bank interest is considered. Of that interest, £1,570 is covered by the starting rate for savings and £1,000 is covered by the personal savings allowance, both at 0%. The remaining £3,430 is taxed at 20%, giving tax of £686.

• £806 incorrectly taxes the Cash ISA interest as part of the savings income calculation.
• £1,000 ignores the remaining starting rate for savings and uses only the personal savings allowance.
• £1,200 taxes all ordinary bank interest at 20% and ignores both 0% savings bands.

Her ordinary bank interest above the remaining starting-rate band and personal savings allowance is £3,430, taxed at 20%.

Question 6

Topic: Taxation of Investors and Investments

An adviser is preparing a cash-flow plan before recommending pension contributions. The client had PAYE salary for part of the tax year, the former employer had its own payroll NIC liability, the client then became a sole trader with taxable trading profits, and the client wants to fill earlier gaps in their State Pension record using voluntary NI payments. Which National Insurance classification is the single best summary?

• A. Class 1A is for employee earnings, Class 1B for sole-trader profits, Class 2 for voluntary gap-filling, and Class 4 for employer payroll.
• B. Class 1 primary is for the employee, Class 1 secondary for the employer, Class 2/Class 4 for the self-employed, and Class 3 for voluntary gap-filling.
• C. Class 2 is for employee earnings, Class 3 for the employer, Class 4 for voluntary gap-filling, and Class 1 for sole-trader profits.
• D. Class 1 primary is for the employee, Class 1 secondary for the self-employed, Class 2/Class 4 for employers, and Class 3 for benefits in kind.

Best answer: B

What this tests: Taxation of Investors and Investments

Explanation: National Insurance is classified by who is liable and the type of income or contribution. For employed earnings, the employee’s liability is Class 1 primary and the employer’s liability on payroll earnings is Class 1 secondary. A sole trader is not treated as paying employee Class 1 on business profits; self-employment falls under the self-employed NIC categories, commonly Class 2 and Class 4, subject to the rules for the year. Voluntary payments made to fill gaps in the State Pension record are Class 3 contributions. The adviser can identify these categories for planning without using current-year rates or thresholds.

• Treating Class 1 secondary as a self-employed category confuses the employer’s payroll liability with sole-trader NICs.
• Putting voluntary gap-filling under Class 4 is wrong because Class 4 relates to self-employed profits.
• Using Class 1A or Class 1B for the salary and profit facts is not appropriate; those employer classes relate to benefits or PAYE settlement arrangements.

This correctly maps the main NIC classes to employee, employer, self-employed, and voluntary contribution liabilities.

Question 7

Topic: Taxation of Investors and Investments

Harriet dies with the following IHT facts. Assume the IHT death rate is 40%, the nil-rate band is £325,000, and ignore the residence nil-rate band, taper relief, trust periodic or exit charges, and any reduced charitable rate.

• Assets owned at death before reliefs: £1,100,000, including £200,000 of shares qualifying for 100% business relief.
• Four years before death, Harriet transferred £150,000 into a discretionary trust.
• Three years before death, she gave a cottage to her daughter but continued to use it rent-free. Its value at death is £250,000, and it is treated as a gift with reservation.
• Her late spouse left 40% of his nil-rate band unused, and this is available to Harriet’s estate.
• A valid deed of variation redirects £80,000 of a cash legacy to a registered charity for IHT purposes.

What is the IHT payable on Harriet’s death estate?

• A. £306,000
• B. £246,000
• C. £206,000
• D. £358,000

Best answer: A

What this tests: Taxation of Investors and Investments

Explanation: The gift with reservation is included in Harriet’s estate at its death value because she continued to benefit from the cottage rent-free. Start with £1,100,000 owned at death, add the £250,000 reserved-benefit cottage, then deduct £200,000 business relief and the £80,000 charitable gift made effective by the deed of variation. This gives a chargeable estate before nil-rate band of £1,070,000. The available nil-rate band is Harriet’s £325,000 plus 40% transferred from her late spouse, or £130,000, giving £455,000. The £150,000 discretionary trust transfer was a chargeable lifetime transfer within seven years, so it uses nil-rate band before the death estate. The remaining nil-rate band is £305,000. The taxable estate is £765,000, so IHT is £306,000.

• Excluding the rent-free cottage would understate the estate because a gift with reservation remains within the donor’s IHT estate.
• Ignoring the discretionary trust transfer would give too much nil-rate band to the death estate.
• Ignoring the transferable nil-rate band would overstate the taxable estate.
• Business relief and the charitable deed of variation reduce the chargeable estate before applying the nil-rate band.

The chargeable estate is £1,070,000 and the available nil-rate band after the trust transfer is £305,000, leaving £765,000 taxable at 40%.

Question 8

Topic: Taxation of Investors and Investments

An adviser is reviewing the income tax position of a UK discretionary trust. The trustees received £6,000 of bank interest during the tax year and retained the income within the trust. The settlor has created no other relevant trusts, so the trust has a £1,000 standard-rate band. For this income, assume interest within the standard-rate band is taxed at 20% and interest above it is taxed at 45%.

What is the single best answer for the trustees’ income tax liability on this income?

• A. £1,200
• B. No trustee liability arises because the beneficiary is taxed directly on retained discretionary trust income.
• C. £2,700
• D. £2,450

Best answer: D

What this tests: Taxation of Investors and Investments

Explanation: For a discretionary trust, trustees are generally responsible for income tax on trust income. The standard-rate band gives a limited amount of income taxable at the relevant basic or ordinary rate before the higher trust rate applies. Here, the trust has £6,000 of bank interest and a £1,000 standard-rate band. The first £1,000 is taxed at 20%, giving £200. The remaining £5,000 is taxed at the trust rate of 45%, giving £2,250. The total trustee income tax liability is therefore £2,450. The fact that the income is retained within the discretionary trust is important because it is not being treated as income mandated directly to a beneficiary.

• Taxing all £6,000 at 20% ignores the trust rate applying above the standard-rate band.
• Taxing all £6,000 at 45% ignores the £1,000 standard-rate band.
• Treating the beneficiary as directly taxable is not appropriate for retained income in a discretionary trust.

The first £1,000 is taxed at 20% and the remaining £5,000 is taxed at 45%, giving £200 + £2,250 = £2,450.

Question 9

Topic: Taxation of Investors and Investments

A client in England and Wales has no valid will and is living with an unmarried partner. Their adviser explains that, if the client died, the estate would be distributed under a statutory order of relatives rather than by personal wishes, and the partner would not have an automatic entitlement. Which estate-planning concept matches this explanation?

• A. Intestacy rules
• B. Business relief
• C. Lasting power of attorney
• D. Potentially exempt transfer rules

Best answer: A

What this tests: Taxation of Investors and Investments

Explanation: In England and Wales, intestacy rules apply when someone dies without a valid will. They set a statutory order for distributing the estate, usually prioritising a spouse or civil partner and certain blood relatives. A key estate-planning point is that an unmarried partner does not automatically inherit under these rules, even after a long relationship. This matters because a client’s assumptions about who will benefit may be very different from the legal outcome. Making a valid will is therefore central to directing assets to chosen beneficiaries and avoiding unintended results.

• Potentially exempt transfer rules concern lifetime gifts and whether they fall out of the estate for inheritance tax after survival for the required period.
• Business relief can reduce inheritance tax on qualifying business assets; it does not decide who inherits when there is no will.
• A lasting power of attorney allows someone to make decisions during lifetime if capacity is lost; it has no role in distributing an estate after death.

Intestacy rules determine who inherits when a person dies without a valid will, which can exclude an unmarried partner in England and Wales.

Question 10

Topic: Taxation of Investors and Investments

Maya is UK resident. For the tax year, assume:

• Personal allowance: £12,570
• Starting rate for savings: 0% on up to £5,000 of savings income, reduced only by taxable non-savings income above the personal allowance
• Personal Savings Allowance for a basic rate taxpayer: £1,000
• Basic rate on savings income not covered by these allowances or nil-rate bands: 20%

Maya has employment income of £11,000 and bank interest of £8,000 from a taxable savings account outside an ISA. She has no other income and remains a basic rate taxpayer. Which treatment correctly matches the tax position for the bank interest?

• A. £1,570 is covered by unused personal allowance, £1,000 is covered by the Personal Savings Allowance, and £5,430 is taxed at 20%.
• B. £5,000 is taxed at the 0% starting rate, £1,000 is covered by the Personal Savings Allowance, and £2,000 is taxed at 20%.
• C. The full £8,000 is tax-free because ordinary bank interest is treated in the same way as cash ISA interest for basic rate taxpayers.
• D. £1,570 is covered by unused personal allowance, £5,000 is taxed at the 0% starting rate, £1,000 is covered by the Personal Savings Allowance, and £430 is taxed at 20%.

Best answer: D

What this tests: Taxation of Investors and Investments

Explanation: Savings income is considered after the personal allowance has first covered non-savings income such as employment income. Maya’s salary of £11,000 uses £11,000 of the £12,570 personal allowance, leaving £1,570 available against her bank interest. Because her taxable non-savings income is nil, the full £5,000 starting rate for savings is available at 0%. As a basic rate taxpayer, she also has a £1,000 Personal Savings Allowance. These amounts cover £7,570 of the £8,000 interest, leaving £430 taxable at the basic savings rate of 20%. The account is outside an ISA, so the interest is not automatically exempt from income tax.

• Ignoring the unused personal allowance overstates the taxable savings income.
• Omitting the starting rate for savings misses a separate 0% band that can apply where taxable non-savings income is low.
• Treating ordinary bank interest like cash ISA interest is incorrect; ISA interest is exempt, but taxable savings accounts still follow the savings income rules.

Her employment income leaves £1,570 of personal allowance unused, and no taxable non-savings income reduces the £5,000 starting rate band.

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