R05 Share protection: free practice questions

1. Question 1 of 5

   What is the main purpose of share protection insurance?

   Option A: To meet the cost of recruiting a replacement directorOption B: To insure the company against a fall in its share price after a deathOption C: To pay the company's corporation tax bill on its profitsOption D: To fund the survivors' purchase of a deceased shareholder's shares

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   The answer is D: To fund the survivors' purchase of a deceased shareholder's shares

   Share protection provides funds so that the deceased's family receive cash for the shares and the surviving shareholders keep control of the company.

   Why the other options are wrong

   A

   Recruitment costs are a key person need.

   B

   Share protection isn't about the share price falling.

   C

   It doesn't pay the company's corporation tax.

2. Question 2 of 5

   Why is a buy-and-sell agreement generally NOT recommended for share protection?

   Option A: It's a binding contract for sale, so IHT Business Relief is lostOption B: It does not fix the purchase price of the shares in advanceOption C: It requires the company to buy back its own sharesOption D: It cannot be used by more than two shareholders at a time

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   The answer is A: It's a binding contract for sale, so IHT Business Relief is lost

   Business Relief does not apply where there is a binding contract for sale at death, and a buy-and-sell agreement is such a contract. A cross-option agreement preserves Business Relief.

   Why the other options are wrong

   B

   A buy-and-sell agreement can fix the price; the problem is the loss of Business Relief.

   C

   It's the shareholders who buy, not the company.

   D

   It isn't limited to two shareholders.

3. Question 3 of 5

   Rita and Sam use automatic accrual, leaving their shares to each other and each holding an own-life policy in trust for their family. The business has doubled in value, but the policies have not increased. What is the main risk?

   Option A: The deceased's family may feel under-compensated and seek moreOption B: The company must be wound up when one of them diesOption C: The policies will become qualifying policies for income taxOption D: The shares will be taxed as income on the survivor

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   The answer is A: The deceased's family may feel under-compensated and seek more

   If the shares are worth more than the policy proceeds, the family may pursue additional compensation. Cover should be kept up to date, and a clause can require survivors to make up any shortfall.

   Why the other options are wrong

   B

   Nothing forces the company to be wound up.

   C

   The policies' qualifying status isn't the risk here.

   D

   The shares pass to the survivors; they aren't taxed as income.

4. Question 4 of 5

   A company has four shareholding directors. Why is an own-life in trust arrangement generally more practical than life of another policies?

   Option A: One policy per director is enough, and a flexible trust adapts to changesOption B: It avoids the need for any trust documentation at allOption C: Its premiums qualify for corporation tax relief for the company itselfOption D: It gives the family of each director the full death benefit

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   The answer is A: One policy per director is enough, and a flexible trust adapts to changes

   Life of another would need a policy on each co-director and becomes unwieldy when shareholdings change, and a deceased's policies pass to their estate. Own-life in trust needs only four policies, and a flexible shareholder trust can admit new directors.

   Why the other options are wrong

   B

   Own-life in trust relies on trust documentation.

   C

   Share protection premiums don't get corporation tax relief.

   D

   In share protection the policy money goes to the surviving shareholders to buy the shares, with the family receiving the sale price.

5. Question 5 of 5

   A company pays the share protection premiums on its directors' own-life policies. What is the tax effect?

   Option A: The policy proceeds become taxable trading receiptsOption B: They are extra income for the directors, with tax and NICs payableOption C: The premiums are exempt from tax under Business ReliefOption D: There are no tax consequences for the company or the directors

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   The answer is B: They are extra income for the directors, with tax and NICs payable

   Participants normally pay premiums from taxed income. If the company pays, the amounts are treated as extra remuneration, subject to income tax and NICs, and the company pays employer's NICs, although it can deduct the cost.

   Why the other options are wrong

   A

   The proceeds are paid under trusts for the shareholders, not to the company as trading receipts.

   C

   Business Relief is an IHT relief on business assets; it doesn't exempt premiums from income tax.

   D

   If the company pays, the premiums are extra pay for the directors, which has tax consequences.

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