R05 Offshore policies: free practice questions

1. Question 1 of 5

   What is the main difference between how gains on offshore and onshore bonds are taxed for a UK resident?

   Option A: Offshore gains are taxable in full because the fund has not paid UK taxOption B: Offshore gains are tax-free if held for ten yearsOption C: Offshore gains are subject to capital gains tax rather than income taxOption D: Onshore gains are taxed at 45% and offshore gains at 20%

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   The answer is A: Offshore gains are taxable in full because the fund has not paid UK tax

   An offshore fund has generally not suffered tax, so there is no basic rate credit. The whole gain is taxable at the policyholder's rates, not just the excess over the basic rate.

   Why the other options are wrong

   B

   Holding an offshore bond for ten years doesn't make gains tax-free.

   C

   Offshore bond gains are income, not capital gains.

   D

   That's wrong both ways: onshore gains get a 20% credit, and offshore gains are taxed at the full rate.

2. Question 2 of 5

   Poppy has no other taxable income and makes a £9,500 chargeable gain on an offshore bond. How much income tax is due?

   Option A: £950Option B: £3,800Option C: NilOption D: £1,900

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   The answer is C: Nil

   An offshore gain is added to income. With no other income, the whole £9,500 falls within Poppy's £12,570 personal allowance, so no tax is due.

   Why the other options are wrong

   A

   £950 charges 10%, but the personal allowance covers the whole gain.

   B

   £3,800 charges 40%, but there's no tax to pay at all here.

   D

   £1,900 charges 20%, but the gain fits within her unused personal allowance.

3. Question 3 of 5

   Which of the following can NOT be used to reduce the tax on an offshore bond gain?

   Option A: A 20% basic rate credit for tax paid in the fundOption B: The personal savings allowance, where availableOption C: The starting rate band for savings incomeOption D: The personal allowance, if not already used

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   The answer is A: A 20% basic rate credit for tax paid in the fund

   An offshore fund generally pays no UK tax, so there is no basic rate credit. The personal allowance, starting rate for savings and personal savings allowance can all reduce the liability.

   Why the other options are wrong

   B

   The personal savings allowance can be set against an offshore gain.

   C

   The starting rate band for savings can be set against an offshore gain.

   D

   The personal allowance can reduce tax on an offshore gain if it isn't used by other income.

4. Question 4 of 5

   Marta's offshore bond has run for 12 complete years and produces a gain of £30,000. What top slice is used to test whether a higher rate liability arises?

   Option A: £3,000Option B: £2,500Option C: £2,000Option D: £30,000

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   The answer is B: £2,500

   Top slicing is available for offshore bonds too. The slice is £30,000 ÷ 12 = £2,500.

   Why the other options are wrong

   A

   £3,000 divides by 10; the bond has run 12 complete years, so £30,000 ÷ 12 = £2,500.

   C

   £2,000 divides by 15; the right divisor is the 12 complete years held.

   D

   £30,000 is the whole gain; top slicing is available for offshore bonds too.

5. Question 5 of 5

   A higher rate taxpayer expects to become a basic rate taxpayer after retiring in ten years. Why might an offshore bond suit them?

   Option A: Gross roll-up while a higher rate payer, then encashment when the rate may be lowerOption B: Offshore bonds give income tax relief on the premium at the higher rateOption C: Offshore gains become exempt from income tax once the holder has fully retiredOption D: Offshore bonds avoid inheritance tax automatically

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   The answer is A: Gross roll-up while a higher rate payer, then encashment when the rate may be lower

   Growth builds up largely untaxed in the fund. If the bond is encashed when the investor pays a lower rate, the eventual tax on the gain may be reduced.

   Why the other options are wrong

   B

   Offshore bond premiums don't get tax relief.

   C

   Offshore gains stay taxable after retirement, just possibly at a lower rate.

   D

   Offshore bonds don't avoid IHT automatically.

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