R05 CIC taxation: free practice questions

1. Question 1 of 5

   How is a lump sum from an individual critical illness policy treated for income tax?

   Option A: It is taxed as savings incomeOption B: It is taxed only for higher rate taxpayersOption C: It is tax-free, as it is not a chargeable eventOption D: It is taxed at 20% at source by the insurer

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   The answer is C: It is tax-free, as it is not a chargeable event

   Payment of individual critical illness benefit is not a chargeable event, so there is no income tax, even for higher or additional rate taxpayers. There is no capital gains tax either.

   Why the other options are wrong

   A

   A critical illness payment isn't savings income.

   B

   Higher-rate taxpayers don't pay tax on it either.

   D

   No tax is deducted at source.

2. Question 2 of 5

   An employer pays the premiums for an employee's group critical illness cover. How is this treated for tax?

   Option A: The claim payment is taxed through PAYEOption B: The premium has no tax consequences at all for the employeeOption C: The premium is taxed as a chargeable eventOption D: The premium is taxable on the employee as a benefit in kind

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   The answer is D: The premium is taxable on the employee as a benefit in kind

   Where the employer pays, the premium is a taxable benefit in kind for the employee. Claims are usually paid directly to the employee with no tax at the point of claim.

   Why the other options are wrong

   A

   Claims are usually paid directly to the employee with no tax at claim.

   B

   Employer-paid premiums are a taxable benefit in kind.

   C

   Premiums aren't chargeable events.

3. Question 3 of 5

   Victor's combined life and critical illness policy is under a split trust. He receives a £200,000 critical illness payment and dies eight months later with most of the money unspent. What is the IHT concern?

   Option A: There is no concern, as trust policies are always outside the estateOption B: The trust must pay a 20% entry chargeOption C: The payment is subject to income tax at 45%Option D: The unspent money is in his estate and may be subject to IHT

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   The answer is D: The unspent money is in his estate and may be subject to IHT

   Under a split trust, the critical illness benefit is paid to the life assured and becomes part of their estate. If they die before spending it, it may attract IHT, unlike a death benefit paid into trust.

   Why the other options are wrong

   A

   Under a split trust, the critical illness benefit goes to him personally, so it isn't outside his estate.

   B

   There's no 20% entry charge on a critical illness payment made to the life assured.

   C

   An individual critical illness payment is free of income tax.

4. Question 4 of 5

   Which statement about the taxation of an individual critical illness payment is INCORRECT?

   Option A: It is not subject to capital gains taxOption B: It is not a chargeable event for income taxOption C: Money left unspent at death may form part of the estate for IHTOption D: Additional rate taxpayers pay income tax on the payment

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   The answer is D: Additional rate taxpayers pay income tax on the payment

   An individual critical illness payment is free of income tax and capital gains tax for all taxpayers, including additional rate taxpayers. Money still held at death can form part of the estate for inheritance tax.

   Why the other options are wrong

   A

   This is correct: it isn't subject to capital gains tax.

   B

   This is correct: a critical illness payment isn't a chargeable event.

   C

   This is correct: money unspent at death can form part of the estate for IHT.

5. Question 5 of 5

   Why do many clients accept the potential IHT drawback of receiving critical illness benefit personally under a split trust?

   Option A: Critical illness payments are exempt from IHT permanentlyOption B: They value having access to the money during their lifetimeOption C: The IHT charge is always refundedOption D: The trust pays any IHT due

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   The answer is B: They value having access to the money during their lifetime

   The possible IHT charge if death follows before the money is spent is outweighed, for many clients, by being able to use the money while alive.

   Why the other options are wrong

   A

   Once paid to the life assured, the money is part of their estate, so it isn't permanently exempt.

   C

   IHT isn't refunded; clients accept the risk for the sake of lifetime access.

   D

   The trust doesn't pay IHT on money paid to the life assured; it's in their own estate.

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