Free CISI PCIAM Practice Questions: Investment Taxation

CISI means Chartered Institute for Securities & Investment. PCIAM means Private Client Investment Advice and Management. Use this focused CISI PCIAM page as a short practice test for Investment Taxation. 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.

Topic snapshot

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: Investment Taxation

A private client asks how to report income from an overseas shareholding held on an investment platform.

Relevant facts:

• The client is UK resident and UK domiciled for the tax year.
• They are an additional-rate taxpayer and have not used their £500 dividend allowance.
• They received US ordinary dividends with a sterling gross amount of £10,000.
• US withholding tax of £1,500 was deducted before £8,500 was credited to the account.
• The relevant UK dividend rate is 39.35%; foreign tax credit relief is available but cannot exceed the UK tax due on the same income.

Which is the best UK tax treatment?

• A. Report only the £8,500 net amount credited to the account and pay additional-rate dividend tax on that amount with no credit for US tax.
• B. Treat the US withholding tax as final, because the income has already been taxed before it reached the UK platform.
• C. Treat the income as overseas savings interest and apply the personal savings allowance before considering any foreign tax credit.
• D. Report the £10,000 gross dividend, calculate UK dividend tax on £9,500, and claim a £1,500 foreign tax credit, leaving £2,238.25 further UK tax payable.

Best answer: D

What this tests: Investment Taxation

Explanation: UK resident and domiciled individuals are generally taxable on worldwide investment income, not just amounts received net of foreign tax. Overseas dividends are brought into the UK computation at their gross sterling amount. Here, the gross dividend is £10,000 and the client has a £500 dividend allowance, so £9,500 is taxed at 39.35%. That gives UK dividend tax of £3,738.25. The £1,500 US withholding tax can be relieved through foreign tax credit relief because it is less than the UK tax due on the same income. The additional UK liability is therefore £3,738.25 minus £1,500, which is £2,238.25.

• Reporting only the net receipt understates taxable income; foreign tax deducted does not remove the need to report the gross income.
• Treating withholding tax as final ignores the UK worldwide-income basis for a UK resident and domiciled investor.
• Classifying an ordinary share dividend as savings interest applies the wrong income category and the wrong allowance.

A UK resident and domiciled client is taxed on worldwide dividend income, with credit for overseas withholding tax limited to the UK tax due on that dividend.

Question 2

Topic: Investment Taxation

An adviser is preparing the CGT computation for a UK-resident private client who sold a taxable listed-share holding outside an ISA.

Client and tax table facts:

• The client is an additional-rate taxpayer with no unused basic-rate band.
• CGT annual exempt amount for the tax year: £3,000.
• CGT rate for this client on listed shares: 24%.
• Same tax year allowable capital loss from another investment: £4,000.
• No other gains or losses are available.

Disposal facts:

• Sold 8,000 shares for £12.50 each.
• Selling commission: £250.
• Original purchase price: £7.20 per share.
• Purchase commission: £120.
• Stamp duty on purchase: £288.

Which CGT computation should the adviser use?

• A. Gain on the disposal £41,742; taxable gain £38,742; CGT £9,298.08.
• B. Gain on the disposal £41,742; taxable gain £34,742; CGT £8,338.08.
• C. Gain on the disposal £42,400; taxable gain £35,400; CGT £8,496.00.
• D. Gain on the disposal £41,742; taxable gain £37,742; CGT £9,058.08.

Best answer: B

What this tests: Investment Taxation

Explanation: For an individual’s CGT computation, start with disposal proceeds after incidental selling costs, then deduct the original acquisition cost and allowable purchase costs. Here, net proceeds are £99,750 (£100,000 less £250). The allowable base cost is £58,008 (£57,600 purchase price plus £120 commission plus £288 stamp duty), giving a disposal gain of £41,742. Same-year capital losses must be set against gains before using the annual exempt amount, so £4,000 is deducted first, leaving £37,742. The £3,000 annual exempt amount then reduces the taxable gain to £34,742. At the provided 24% rate, the CGT is £8,338.08.

• Using £37,742 as the taxable gain fails to deduct the annual exempt amount.
• Using £38,742 as the taxable gain deducts the annual exempt amount but ignores the same-year capital loss.
• Using a £42,400 disposal gain ignores allowable dealing costs and stamp duty that affect proceeds or base cost.

The disposal gain is reduced by the current-year loss and then the annual exempt amount before applying the 24% CGT rate.

Question 3

Topic: Investment Taxation

Mrs Khan is UK resident and domiciled. She is a higher-rate taxpayer and has already used her ISA allowance. She has £96,000 available in a general investment account and wants a relatively low-risk asset to help meet a known £100,000 payment in two years.

Tax and product facts:

Gilt redemption gains are exempt from CGT. Ignore dealing costs and inflation.

The two-year gilt outcome is: gross coupons of £1,000, less income tax of £400, plus a £4,000 CGT-exempt redemption uplift.

Which conclusion is most appropriate?

• A. The gilt is tax-efficient and broadly suitable because most of the return is a CGT-exempt redemption uplift and the maturity matches the two-year objective.
• B. An overseas equity income ETF is preferable because a higher dividend yield would usually produce more income than the gilt coupon.
• C. A corporate bond fund is preferable because interest distributions are taxed at the same rate as the gilt coupon but the yield is likely to be higher.
• D. A VCT is preferable because the 30% income tax relief would exceed the gilt’s tax saving.

Best answer: A

What this tests: Investment Taxation

Explanation: Tax efficiency must be assessed alongside suitability, not in isolation. The gilt’s gross coupon is only £1,000 over two years, so the 40% income tax charge is limited to £400. The £4,000 uplift from £96,000 to £100,000 is exempt from CGT, giving an after-tax gain of £4,600 and expected proceeds of £100,600 if held to redemption. That structure is tax-efficient for a higher-rate taxpayer and also supports the client’s two-year payment objective. Higher-yielding or tax-advantaged alternatives may look attractive, but equity risk, currency risk, illiquidity, or uncertain capital value can make them unsuitable for a known short-term liability.

• A higher overseas dividend yield does not overcome equity, currency, and dividend-tax considerations for a short-term known payment.
• VCT relief is not enough on its own; the risk profile and required holding period conflict with the client’s objective.
• A corporate bond fund may offer a higher yield, but it lacks the same matched redemption value and may expose the client to NAV volatility.

The low-coupon gilt produces £4,600 after tax over two years and aligns the redemption date with the client’s known liability and low-risk requirement.

Question 4

Topic: Investment Taxation

An adviser is reviewing estate-planning options for Mrs Harper, age 72.

Client facts:

• Her estate is materially above the available nil-rate bands.
• She wants to reduce potential IHT for her adult children.
• She needs fixed withdrawals of about £24,000 a year from the amount invested.
• She is in good health and is willing to give up access to surplus capital if the withdrawals are secure.
• Her attitude to risk for this money is medium-low, and a large fall in capital would cause concern.

Which recommendation is most defensible?

• A. Avoid a discounted gift trust, because retaining withdrawals always makes the whole arrangement a gift with reservation and prevents any IHT benefit.
• B. Use an IHT portfolio, because Business Relief assets are outside the estate immediately and remove market risk while preserving full access to capital.
• C. Use an IHT portfolio, because its two-year IHT planning period overrides the client’s medium-low risk tolerance and capacity concerns.
• D. Consider a discounted gift trust, because the retained withdrawal rights may support her cash-flow need while the actuarially discounted gift can reduce the transfer value for IHT; she must understand that she cannot reclaim the gifted capital.

Best answer: D

What this tests: Investment Taxation

Explanation: A discounted gift trust is often used where a client can give up access to capital but wants pre-agreed withdrawals. The gift is normally valued after deducting the actuarial value of the retained rights, subject to underwriting and HMRC acceptance. The gifted element may then fall outside the estate after the relevant survival period, but the settlor cannot later access the trust capital. An IHT portfolio, usually built around Business Relief-qualifying assets such as AIM shares, may achieve IHT relief after two years if the assets qualify and are still held at death. However, it remains the client’s investment and carries significant qualification, liquidity and market risk. Mrs Harper’s cash-flow need and medium-low risk tolerance make a discounted gift trust the more suitable starting point.

• Business Relief is not immediate, guaranteed, or risk-free; qualifying assets must generally be held for the required period and still qualify at death.
• Properly structured retained withdrawal rights in a discounted gift trust do not automatically invalidate the IHT planning.
• A shorter IHT planning period does not override suitability, risk tolerance, liquidity, and capacity for loss.

A discounted gift trust matches the need for fixed withdrawals and potential IHT reduction while requiring loss of access to the gifted capital.

Question 5

Topic: Investment Taxation

A UK-resident and UK-domiciled client asks whether to invest £250,000 of surplus cash through an offshore investment bond.

Client facts:

• Age 58 and currently an additional-rate taxpayer.
• Expects taxable income to fall into the basic-rate band after retirement in seven years.
• ISAs and pension funding for the year have already been used.
• Wants tax-efficient accumulation and may need modest withdrawals before retirement.
• Also wants to reduce IHT, but is not ready to give up access to the money.

Which is the single best suitability conclusion?

• A. The offshore bond is unsuitable solely because UK-domiciled individuals can never obtain tax planning benefits from offshore wrappers.
• B. The offshore bond should be recommended primarily because offshore status keeps all income, gains, and capital outside UK tax.
• C. A non-reporting offshore fund should be used instead because its gains will be taxed as capital gains and covered by the CGT annual exemption.
• D. The offshore bond may be suitable for tax deferral and controlled withdrawals, but it should not be presented as removing IHT while personally owned.

Best answer: D

What this tests: Investment Taxation

Explanation: For a UK-resident and UK-domiciled individual, an offshore investment bond can be suitable where tax deferral, gross roll-up, and administrative simplicity are valuable. Withdrawals within the cumulative 5% allowance are tax-deferred, not tax-free, and a later chargeable event gain is normally taxed as income. The client’s expected move from additional-rate to basic-rate status may make deferral useful, subject to charges, investment risk, and full suitability assessment. However, offshore status does not by itself remove the asset from the UK IHT estate. If the client needs IHT planning, trust or gifting arrangements may be relevant, but those usually involve loss of access, control, or other trade-offs. The recommendation therefore needs a clear separation between tax-deferral benefits and estate-planning objectives.

• Offshore status does not exempt a UK-resident, UK-domiciled policyholder from UK tax on chargeable event gains.
• Saying offshore wrappers never help UK-domiciled clients ignores legitimate deferral and timing benefits.
• Non-reporting offshore fund gains are generally taxed as income for UK investors, not as ordinary CGT gains eligible for CGT treatment.

The client may benefit from gross roll-up and deferred chargeable-event taxation, but personal ownership leaves the bond in the estate for IHT.

Question 6

Topic: Investment Taxation

A client resident in England is preparing her Self-Assessment return. She has no other income or deductions.

Tax-year facts:

Assumptions:

• Net pension contributions and Gift Aid donations are grossed up at 20%.
• Adjusted net income is total income less gross pension contributions and gross Gift Aid donations.
• The personal allowance is £12,570, reduced by £1 for every £2 of adjusted net income above £100,000.
• The basic-rate band is £37,700, extended by gross pension contributions and gross Gift Aid donations.
• Income tax rates are 20% basic and 40% higher for non-savings and savings income; dividend rates are 8.75% basic and 33.75% higher.
• A higher-rate taxpayer has a £500 personal savings allowance and a £500 dividend allowance.

What is her income tax liability before any PAYE tax deducted?

• A. £29,933.25
• B. £33,533.25
• C. £35,333.25
• D. £31,893.25

Best answer: B

What this tests: Investment Taxation

Explanation: The net pension contribution of £6,400 is grossed up to £8,000 and the net Gift Aid donation of £800 is grossed up to £1,000. Total income is £117,200, so adjusted net income is £108,200. The personal allowance is reduced by £4,100, giving an allowance of £8,470. Taxable employment income is therefore £103,530. The basic-rate band is extended to £46,700, so employment tax is £46,700 at 20% (£9,340) plus £56,830 at 40% (£22,732), totalling £32,072. The bank interest is in the higher-rate band, but £500 is covered by the personal savings allowance, leaving £700 taxed at 40% (£280). The dividends are also higher-rate income; after the £500 dividend allowance, £3,500 is taxed at 33.75% (£1,181.25). Total liability is £33,533.25.

• £35,333.25 does not give effect to the gross pension and Gift Aid payments when calculating the tapered personal allowance.
• £31,893.25 incorrectly preserves the full personal allowance despite adjusted net income exceeding £100,000.
• £29,933.25 incorrectly deducts the gross pension and Gift Aid amounts directly from taxable employment income.
• Treating the allowances as exemptions from tax does not stop the savings and dividends from falling above the basic-rate band in this case.

The gross pension and Gift Aid payments reduce adjusted net income and extend the basic-rate band, but they are not deducted directly from taxable employment income.

Question 7

Topic: Investment Taxation

A UK-domiciled client has two separate chargeable shareholdings. The adviser is checking how the IHT valuations feed into the CGT position.

Assumptions:

• The lifetime gift is to a discretionary trust and is an IHT chargeable lifetime transfer.
• No CGT hold-over relief is claimed.
• Ignore annual exempt amounts, losses, and transaction costs.

Which CGT treatment is correct?

• A. Both assets are rebased to their IHT values, so no CGT gain arises on the lifetime gift and only £15,000 arises on the later sale.
• B. The lifetime gift is treated as a disposal at £150,000, giving a £80,000 gain; the inherited asset is rebased to £110,000, so the later sale gives a £15,000 gain.
• C. The lifetime gift creates no CGT gain because it is within the IHT regime; the later sale gives a £65,000 gain using the deceased’s original cost.
• D. The lifetime gift gives a £80,000 gain; the death transfer also gives a £50,000 CGT gain before the beneficiary’s later sale is considered.

Best answer: B

What this tests: Investment Taxation

Explanation: For CGT, a lifetime gift of a chargeable asset is generally treated as a disposal at market value, even though no cash is received. Here, the discretionary trust gift is an IHT chargeable lifetime transfer, but because no hold-over relief is claimed, the client’s CGT gain is £150,000 less £70,000, or £80,000. Death is different. There is no CGT disposal on death, but the asset passing through the estate is rebased to its market value at death, which is commonly the probate/IHT value. The beneficiary’s base cost is therefore £110,000. A later sale for £125,000 gives a CGT gain of £15,000.

• Treating the lifetime gift as outside CGT confuses IHT treatment with CGT disposal rules.
• Charging CGT on death ignores the no-disposal rule and the market value uplift at death.
• Rebasing the lifetime gift to its IHT value without a CGT gain would only be defensible if an available deferral relief applied and was claimed, which the facts exclude.

A chargeable lifetime gift is normally valued at market value for CGT, while death itself is not a CGT disposal and the beneficiary takes the death value as base cost.

Question 8

Topic: Investment Taxation

A UK-resident client is a higher-rate taxpayer and has already used their ISA allowance. They want to invest £100,000 in a general investment account for the highest expected net income over the next year. All four holdings are otherwise acceptable for their risk tolerance and liquidity needs.

They have received no other savings interest or dividends in the tax year.

Tax table for this client:

Proposed holdings:

Ignoring charges and capital changes, which proposed holding is expected to provide the highest approximate net first-year investment income?

• A. Short-dated corporate bond fund, with net income of about £3,320
• B. UK equity income fund, with net income of about £3,481
• C. Cash deposit, with net income of about £3,020
• D. Listed investment trust income shares, with net income of about £3,216

Best answer: B

What this tests: Investment Taxation

Explanation: The comparison must be made on net income, not gross yield. Interest distributions use the personal savings allowance first, then the client’s excess interest is taxed at 40%. Dividend income uses the dividend allowance first, then the excess is taxed at 33.75%. The bond fund has the highest gross yield at 5.2%, producing £5,200 gross interest, but £4,700 is taxed at 40%, leaving £3,320 net. The UK equity income fund produces £5,000 gross dividends; after the £500 dividend allowance, £4,500 is taxed at 33.75%, leaving about £3,481. Its lower tax rate on dividends more than offsets its slightly lower gross yield, so it produces the highest expected net income under the stated assumptions.

• Selecting the bond fund focuses on the highest gross yield, but most of its interest is taxed at 40%.
• Selecting the cash deposit overlooks both its lower gross yield and the same interest tax treatment as the bond fund.
• Selecting the investment trust applies the dividend tax treatment correctly, but its lower gross yield leaves less net income than the equity income fund.

The dividend yield gives £5,000 gross income, of which £500 is tax-free and £4,500 is taxed at 33.75%, leaving about £3,481 net.

Question 9

Topic: Investment Taxation

A UK-resident private client asks for advice after selling part of a cryptoasset holding held outside any tax wrapper.

Client circumstances:

• Higher-rate taxpayer with no unused basic-rate band.
• No other capital gains or capital losses in the tax year.
• Annual exempt amount for CGT: £3,000.
• CGT rate to apply to taxable cryptoasset gains: 24%.

Cryptoasset facts:

• The tokens are personally held investments, not trading stock.
• Opening pooled allowable cost for 10,000 tokens: £12,000.
• She sold 4,000 tokens for net proceeds of £9,900.
• There were no same-day or 30-day acquisitions.
• She continues to hold the remaining 6,000 tokens.

Which conclusion should the adviser document for the tax position on this sale?

• A. The sale creates a chargeable gain of £5,100, leaving a taxable gain of £2,100 and CGT of £504.
• B. No CGT arises until the client withdraws the cash from the crypto exchange into her bank account.
• C. The full £9,900 net proceeds are taxable as income because cryptoassets are not shares or funds.
• D. No tax arises because the client still holds 6,000 tokens and has not fully exited the cryptoasset position.

Best answer: A

What this tests: Investment Taxation

Explanation: For a UK-resident individual holding cryptoassets personally as investments, a sale is normally a disposal for capital gains tax purposes. The tax point is the disposal of the tokens, not the later withdrawal of cash from an exchange. On the facts provided, the pooled allowable cost is £12,000 for 10,000 tokens, or £1.20 per token. The allowable cost for 4,000 tokens is therefore £4,800. Net proceeds of £9,900 less allowable cost of £4,800 gives a chargeable gain of £5,100. With no other gains or losses, the £3,000 annual exempt amount reduces the taxable gain to £2,100. Applying the provided CGT rate of 24% gives CGT of £504. The remaining 6,000 tokens continue to be held with the remaining pooled cost, but that does not defer tax on the tokens already sold.

• Treating the cash withdrawal as the tax point ignores that the sale itself is the disposal.
• Treating all proceeds as income ignores the stated investment holding and the capital gains treatment.
• Treating the continuing holding as preventing tax confuses a partial disposal with a full exit.

The pooled cost attributable to 4,000 tokens is £4,800, so the net gain is £5,100 before the £3,000 annual exempt amount and 24% CGT rate.

Question 10

Topic: Investment Taxation

An adviser is reviewing whether a higher-rate client should use her remaining ISA allowance before the end of the tax year.

Client tax position:

• UK resident and taxed on UK investment income.
• Employment income has already used her personal allowance and basic-rate band.
• All taxable investment income below falls within the higher-rate band.
• Higher-rate personal savings allowance: £500.
• Dividend allowance: £500.
• Higher-rate tax on savings income and REIT property income distributions: 40%.
• Higher-rate dividend tax: 33.75%.
• Stocks and shares ISA income is exempt.
• A UK REIT property income distribution has 20% tax withheld at source and credited through Self Assessment.

Which conclusion gives the correct additional Self Assessment income tax payable on these investment income sources?

• A. A further £1,146.25 is payable, after applying the savings allowance, dividend allowance, REIT withholding credit, and ISA exemption.
• B. A further £1,546.25 is payable, because the ISA income should be added to the client’s savings income before applying the savings allowance.
• C. A further £1,311.25 is payable, because the REIT property income distribution should be pooled with dividends and taxed at the higher dividend rate.
• D. A further £906.25 is payable, because the 20% withheld from the REIT property income distribution fully satisfies the liability on that income.

Best answer: A

What this tests: Investment Taxation

Explanation: Different investment income sources can have different tax treatments even when held by the same client. Bank interest and the corporate bond fund interest distribution are savings income, so £900 plus £600 gives £1,500, less the £500 personal savings allowance, leaving £1,000 taxed at 40% = £400. Equity dividends use the separate dividend allowance: £2,000 less £500 gives £1,500 taxed at 33.75% = £506.25. A UK REIT property income distribution is not a dividend; it is taxed as property income. The £1,200 PID creates a £480 higher-rate liability, but £240 has already been withheld, so a further £240 is due. ISA income is exempt. Total further tax is £400 + £506.25 + £240 = £1,146.25.

• Treating REIT withholding as final misses the higher-rate balance still due through Self Assessment.
• Pooling the REIT property income distribution with dividends applies the wrong allowance and tax rate.
• Including ISA income overstates the liability because ISA income is exempt from income tax.

The taxable savings income is £1,000 at 40%, taxable dividends are £1,500 at 33.75%, and the REIT PID needs a further £240 after the 20% credit.

Continue in the web app

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

Related focused pages

• Free CISI PCIAM Practice Exam
• Free CISI PCIAM Practice Questions: Financial Advice within a Regulated Environment
• Free CISI PCIAM Practice Questions: Financial Markets
• Free CISI PCIAM Practice Questions: Trusts and Trustees
• Free CISI PCIAM Practice Questions: Financial Instruments and Products
• Free CISI PCIAM Practice Questions: Principles of Financial Advice
• Free CISI PCIAM Practice Questions: Portfolio Performance and Review

Practice next step

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