R05 Chargeable events and gains: free practice questions

1. Question 1 of 5

   Which tax applies to a chargeable gain on a life policy held by its original owner?

   Option A: Corporation taxOption B: Inheritance taxOption C: Income taxOption D: Capital gains tax

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   The answer is C: Income tax

   Despite the name, chargeable gains on life policies are subject to income tax, not capital gains tax. There is no separate 'chargeable gains tax'.

   Why the other options are wrong

   A

   An individual owner pays income tax; corporation tax is for companies.

   B

   IHT concerns transfers of value, not chargeable gains on policies.

   D

   Despite the name, chargeable gains are subject to income tax, not CGT.

2. Question 2 of 5

   A 15-year qualifying endowment was made paid-up after 8 years and has now matured. Why is the maturity a chargeable event?

   Option A: Because all maturities of qualifying policies are chargeable eventsOption B: Because the policy was made paid-up within three-quarters of the termOption C: Because premiums were paid for more than ten yearsOption D: It is not a chargeable event

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   The answer is B: Because the policy was made paid-up within three-quarters of the term

   Death and maturity under a qualifying policy become chargeable events if the policy was made paid-up within ten years or three-quarters of the term if sooner. For a 15-year term, three-quarters is 11.25 years, so making it paid-up at 8 years counts.

   Why the other options are wrong

   A

   Maturity of a qualifying policy isn't normally chargeable; it only becomes so if it was made paid-up early.

   C

   Paying premiums for more than ten years doesn't create a chargeable event; making it paid-up early did.

   D

   It is chargeable, because the policy was made paid-up within three-quarters of the term.

3. Question 3 of 5

   Which payment under a life policy is NOT a chargeable event?

   Option A: A withdrawal exceeding the cumulative 5% allowanceOption B: Payment of a critical illness benefitOption C: A death benefit from a non-qualifying bondOption D: A full surrender of an investment bond

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   The answer is B: Payment of a critical illness benefit

   Payment of critical illness benefit is specifically not a chargeable event. The other options are chargeable events and may give rise to a gain.

   Why the other options are wrong

   A

   A withdrawal above the cumulative 5% allowance is a chargeable event.

   C

   A death benefit from a non-qualifying bond is a chargeable event.

   D

   A full surrender of an investment bond is a chargeable event.

4. Question 4 of 5

   Isla invested £60,000 in a non-qualifying bond. She took no withdrawals in policy years one to three. What is the maximum she can withdraw in policy year four without triggering an immediate chargeable gain?

   Option A: £12,000Option B: £15,000Option C: £9,000Option D: £3,000

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   The answer is A: £12,000

   The 5% allowance is cumulative. After four policy years, Isla can withdraw 4 × 5% × £60,000 = £12,000 on a tax-deferred basis.

   Why the other options are wrong

   B

   £15,000 counts five years; only four have been reached.

   C

   £9,000 counts three years; in policy year four she has four years' worth.

   D

   £3,000 is only one year's allowance; unused years build up.

5. Question 5 of 5

   An investor bought a traded endowment from its original owner. On maturity, the investor receives the proceeds. Which tax could apply to the investor's profit?

   Option A: Income tax at higher rates onlyOption B: Inheritance taxOption C: No tax, as the policy is qualifyingOption D: Capital gains tax

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   The answer is D: Capital gains tax

   A policy bought from its original owner for money or money's worth is 'second-hand'. On maturity, death or resale, the buyer's profit is within capital gains tax. This is essentially the only time CGT applies to a life policy.

   Why the other options are wrong

   A

   A second-hand policy is the exception where the buyer's profit falls within CGT, not income tax.

   B

   IHT concerns transfers of value such as gifts or death, not the investor's profit on maturity.

   C

   Qualifying status doesn't protect a second-hand buyer from CGT.

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