R05 Taxation of policy gains: free practice questions

1. Question 1 of 5

   Hannah is a basic rate taxpayer whose income is £15,000 below the higher rate threshold. She makes a £9,000 gain on an onshore bond. How much further income tax is due on the gain?

   Option A: £1,800Option B: £3,600Option C: NilOption D: £900

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   The answer is C: Nil

   The gain falls entirely within the basic rate band. Basic rate tax is treated as paid within the fund, so no further tax is due.

   Why the other options are wrong

   A

   £1,800 charges 20%, but basic rate is already treated as paid in the fund.

   B

   £3,600 charges 40%, but the gain stays within the basic rate band.

   D

   £900 isn't due; within the basic rate band there's nothing more to pay.

2. Question 2 of 5

   What is the purpose of top slicing relief?

   Option A: To exempt gains below £5,000 from taxOption B: To reduce the gain by the total of the 5% withdrawals already takenOption C: To remove the gain from income when working out the personal allowanceOption D: To stop a gain built up over several years being taxed as if made in one year

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   The answer is D: To stop a gain built up over several years being taxed as if made in one year

   Top slicing relief applies where adding the gain would push the taxpayer into a higher band. It works out the rate using an annual 'slice' of the gain, reflecting that the gain accrued over the life of the policy.

   Why the other options are wrong

   A

   There's no £5,000 exemption for gains.

   B

   5% withdrawals are dealt with in the gain calculation, not by top slicing.

   C

   Top slicing doesn't help with the personal allowance test.

3. Question 3 of 5

   Kieran has non-savings income of £96,000 and makes a £14,000 onshore bond gain. By how much is his personal allowance reduced as a result of the gain?

   Option A: £7,000Option B: £14,000Option C: £3,000Option D: £5,000

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   The answer is D: £5,000

   Adjusted income becomes £110,000. The allowance is reduced by £1 for every £2 over £100,000, so (£110,000 − £100,000) ÷ 2 = £5,000. Before the gain, his income was below £100,000 and there was no reduction.

   Why the other options are wrong

   A

   £7,000 halves the whole gain, but only the £10,000 above £100,000 causes a reduction.

   B

   £14,000 is the gain itself; only the income above £100,000 matters, and it's halved.

   C

   £3,000 doesn't follow: (£110,000 − £100,000) ÷ 2 = £5,000.

4. Question 4 of 5

   A bond held in a discretionary trust is surrendered at a gain. The settlor is alive and UK resident. Who is taxed on the gain?

   Option A: No one, as trusts are exempt from gains taxOption B: The settlor, who can recover the tax from the trusteesOption C: The trustees, at the 45% trust rate, from the proceedsOption D: The beneficiaries, in equal shares by income

   Show answer

   The answer is B: The settlor, who can recover the tax from the trustees

   Where the settlor is alive, or it is the tax year of their death, and they are UK resident, the gain is taxed on the settlor. They have the right to recover the tax paid from the trustees.

   Why the other options are wrong

   A

   Trusts aren't exempt: someone is always chargeable, here the settlor.

   C

   Trustees are taxed only when the settlor is dead or not UK resident; here the settlor is alive and resident.

   D

   Beneficiaries aren't taxed on the gain while the settlor is alive and UK resident.

5. Question 5 of 5

   Why do Scottish income tax rates not directly change the tax on a bond gain made by a Scottish taxpayer?

   Option A: Bond gains are exempt in ScotlandOption B: Bond gains are treated as savings income, which uses UK ratesOption C: Scottish rates only apply to trustsOption D: Bond gains are subject to capital gains tax in Scotland instead

   Show answer

   The answer is B: Bond gains are treated as savings income, which uses UK rates

   Scotland can set different rates for non-savings, non-dividend income. Bond gains are savings income, so they are not taxed at Scottish rates, although the interaction with earned income can affect top slicing.

   Why the other options are wrong

   A

   Bond gains aren't exempt in Scotland.

   C

   Scottish rates apply to individuals' non-savings income, not just trusts.

   D

   Bond gains are income, not capital gains, in Scotland too.

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