R05 Taxation of life funds: free practice questions

1. Question 1 of 5

   Broadly, at what rate is a UK life fund taxed on its interest income and realised capital gains?

   Option A: 45%Option B: 20%Option C: 0%Option D: 40%

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   The answer is B: 20%

   The overall effect of the complex rules is that a UK life fund bears tax at broadly 20% on interest, rent and realised gains. UK and overseas dividends are generally exempt.

   Why the other options are wrong

   A

   45% is the additional rate for individuals, not the life fund rate.

   C

   UK life funds do pay tax on interest and gains, broadly 20%.

   D

   40% is a higher rate of personal tax, not the life fund rate.

2. Question 2 of 5

   Which type of income received by a UK life fund is generally NOT taxed within the fund?

   Option A: Interest from corporate bondsOption B: Dividends from UK companiesOption C: Rent from commercial propertyOption D: Interest on cash deposits

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   The answer is B: Dividends from UK companies

   UK and overseas dividends received by a life fund are generally exempt. Interest and rent are taxed at 20%.

   Why the other options are wrong

   A

   Interest from corporate bonds is taxed within the fund at 20%.

   C

   Rent from property is taxed within the fund at 20%.

   D

   Interest on cash deposits is taxed within the fund at 20%.

3. Question 3 of 5

   What is meant by 'gross roll-up' in an offshore life fund?

   Option A: Growth is guaranteed to exceed inflationOption B: All charges are deducted from the fund before growth is addedOption C: Tax is deducted at 45% but can be reclaimed laterOption D: Income and gains accumulate with little or no tax in the fund

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   The answer is D: Income and gains accumulate with little or no tax in the fund

   Offshore jurisdictions generally impose little or no tax on the underlying fund, apart from some non-reclaimable withholding tax on certain income. Growth therefore rolls up largely untaxed until a chargeable event occurs.

   Why the other options are wrong

   A

   Offshore growth isn't guaranteed.

   B

   Gross roll-up is about tax, not the order in which charges are taken.

   C

   Offshore funds pay little or no tax, not 45%.

4. Question 4 of 5

   For which type of investor is the gross roll-up of an offshore bond usually most valuable?

   Option A: A non-taxpayer who needs a regular income from the bond immediatelyOption B: A basic rate taxpayer who plans to surrender within a yearOption C: A charity investing surplus reservesOption D: A higher or additional rate taxpayer deferring tax over the long term

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   The answer is D: A higher or additional rate taxpayer deferring tax over the long term

   Untaxed growth in the fund is most valuable to higher and additional rate taxpayers. On eventual surrender, the full gain is taxed at the policyholder's rates, so there is scope to plan, for example by encashing when their tax rate is lower.

   Why the other options are wrong

   A

   A non-taxpayer needing income now gets little from tax deferral.

   B

   A short holding period gives little benefit from roll-up.

   C

   A charity doesn't need tax deferral in the same way.

5. Question 5 of 5

   How does the tax position of an onshore bond's fund differ from that of an offshore bond's fund?

   Option A: Both funds pay corporation tax at the main rate of 25%Option B: The onshore fund pays about 20% on most returns; the offshore fund little or noneOption C: The onshore fund is untaxed, while the offshore fund pays tax at a flat 20%Option D: Neither fund pays tax, but onshore policyholders get a 45% tax credit

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   The answer is B: The onshore fund pays about 20% on most returns; the offshore fund little or none

   An onshore fund suffers tax at around 20% on most income and gains, which gives the policyholder a notional basic rate credit. An offshore fund generally pays little or no tax, so there is no credit and the whole gain is taxable.

   Why the other options are wrong

   A

   Life funds are taxed at 20% onshore, not 25%, and offshore funds pay little or none.

   C

   It's the other way round: the onshore fund is taxed and the offshore fund generally isn't.

   D

   The onshore fund does pay tax, and the credit given to policyholders is basic rate (20%), not 45%.

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