R05 IHT planning with life policies: free practice questions

1. Question 1 of 5

   Why is a whole of life policy in trust particularly useful for paying inheritance tax on death?

   Option A: IHT is usually due before the grant, and trust proceeds can be paid without waiting for itOption B: The proceeds are sent directly to HMRC by the insurer, so no tax return is neededOption C: The premiums paid are deductible from the value of the estate for IHT purposesOption D: It removes the need for the personal representatives to value the rest of the estate

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   The answer is A: IHT is usually due before the grant, and trust proceeds can be paid without waiting for it

   Personal representatives normally have to pay IHT before the grant, but cannot access estate assets without it. Trust proceeds are outside the estate and can be paid quickly, providing cash to pay the tax.

   Why the other options are wrong

   B

   Insurers don't send proceeds to HMRC; they pay the trustees.

   C

   Premiums aren't deducted from the estate's value.

   D

   The estate still has to be valued.

2. Question 2 of 5

   Following the Finance Act 2013 changes, why is there no longer an IHT advantage in writing a policy in trust specifically to repay a mortgage on death?

   Option A: A liability is only deductible to the extent it is repaid from the estateOption B: Mortgages are no longer repayable on deathOption C: Trust proceeds used to repay a mortgage are now taxed at 20%Option D: Mortgage protection policies can no longer be written in any kind of trust

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   The answer is A: A liability is only deductible to the extent it is repaid from the estate

   Liabilities now reduce the estate only if repaid from the estate. If trustees repay the mortgage with money from outside the estate, the debt is not deductible, so the net IHT result is the same. The speed advantages of a trust remain.

   Why the other options are wrong

   B

   Mortgages are still repayable on death; the change concerns whether the debt reduces the estate.

   C

   Trust proceeds used to repay a mortgage aren't taxed at 20%.

   D

   Mortgage protection policies can still be written in trust; the change was about deducting liabilities.

3. Question 3 of 5

   Leonard pays a £3,000 annual premium, within his annual exemption, into a policy in trust for his children for 12 years. Ignoring investment growth, how much IHT could this save compared with keeping the money in his estate?

   Option A: £36,000Option B: £14,400Option C: £12,000Option D: £7,200

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   The answer is B: £14,400

   Twelve premiums of £3,000 remove £36,000 from the estate. At 40%, the potential IHT saving is £14,400, and the policy proceeds are paid to the beneficiaries free of IHT.

   Why the other options are wrong

   A

   £36,000 is the amount removed from the estate, not the tax saved.

   C

   £12,000 isn't 40% of the £36,000 removed.

   D

   £7,200 applies 20%; IHT on death is 40%.

4. Question 4 of 5

   Marcus makes a £500,000 PET to his daughter. Which policy best matches the potential IHT on the gift itself if he dies within seven years?

   Option A: A gift inter vivos policy, level for three years then reducing with taperOption B: A seven-year level term assurance for the full amount of the giftOption C: A level whole of life policy written on his own life under trustOption D: A 25-year decreasing term assurance reducing in line with a mortgage

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   The answer is A: A gift inter vivos policy, level for three years then reducing with taper

   The tax on a failed PET is reduced by taper relief for deaths between three and seven years after the gift. A gift inter vivos policy stays level for three years and then decreases to match.

   Why the other options are wrong

   B

   Level term overlooks taper relief, which reduces the tax on the gift for deaths after three years.

   C

   Whole of life cover suits an ongoing estate liability, not tax on a gift that falls away after seven years.

   D

   A mortgage-linked decreasing term reduces on the wrong pattern and runs for far too long.

5. Question 5 of 5

   If a donor dies within seven years of making a PET that exceeds the nil-rate band, who is normally liable to pay the IHT on the gift?

   Option A: The donor's personal representativesOption B: HMRC writes off the taxOption C: The donee who received the giftOption D: The donor's spouse

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   The answer is C: The donee who received the gift

   Tax on a failed PET is normally paid by the donee. This is why the donee may take out a policy on the donor's life, supported by the insurable interest that the potential liability creates.

   Why the other options are wrong

   A

   Tax on a failed PET is normally paid by the recipient, not the personal representatives.

   B

   HMRC doesn't write off the tax.

   D

   The donor's spouse isn't liable for tax on a gift to someone else.

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