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CFP UK (CISI) study materials
CFP UK (CISI) study resources

CFP UK (CISI) practice questions

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Question 1Financial Planning

Under the UK tax system, which allowance is designed to protect a saver's income from tax on the first tranche of interest received, and is available in addition to the personal allowance?

  1. The personal savings allowance Correct answer.
  2. The trading allowance
  3. The dividend allowance
  4. The marriage allowance

Explanation

The personal savings allowance gives basic rate taxpayers £1,000 of savings interest free of tax, higher rate taxpayers £500, and additional rate taxpayers nil. It sits alongside the personal allowance rather than replacing it, so a basic rate taxpayer can receive interest within both allowances without a liability.

Question 2Financial Planning

A client wants to shelter £40,000 of new money into ISAs in a single tax year. Which combination is permitted under current ISA rules for an adult under 40?

  1. £40,000 into a single cash ISA
  2. £40,000 split equally between a cash ISA and a lifetime ISA
  3. £20,000 into a lifetime ISA and £20,000 into a cash ISA
  4. £20,000 into a cash ISA and £20,000 into a stocks and shares ISA Correct answer.

Explanation

The overall adult ISA subscription limit is £20,000 per tax year across all permitted ISA types, with full flexibility to split between cash and stocks and shares components. The lifetime ISA has its own £4,000 sub-limit within that overall allowance. Subscribing more than £20,000 in total is not permitted regardless of the wrapper used.

Question 3Financial Planning

Which body is responsible for setting the Bank Rate that underpins short-term interest rates in the UK?

  1. The Debt Management Office
  2. The Financial Conduct Authority
  3. The Prudential Regulation Authority
  4. The Monetary Policy Committee of the Bank of England Correct answer.

Explanation

The Monetary Policy Committee sets Bank Rate as part of its remit to meet the inflation target, and this rate anchors wholesale and retail short-term rates. The other bodies regulate conduct, prudential soundness, or government debt issuance rather than monetary policy.

Question 4Financial Planning

A client aged 58 has a defined contribution pension and wishes to take benefits flexibly while continuing to work full time. Which statement best describes the current position on the money purchase annual allowance?

  1. It applies only where the entire fund is taken as a lump sum
  2. It reduces the annual allowance only after the client reaches age 55
  3. It restricts contributions to defined benefit schemes rather than money purchase schemes
  4. It reduces the annual allowance for further money purchase contributions once flexible income has been accessed Correct answer.

Explanation

Triggering flexible access to a money purchase arrangement, for example by taking an income drawdown payment or an uncrystallised funds pension lump sum, activates the money purchase annual allowance for future money purchase contributions. It does not affect defined benefit accrual, which remains subject to the standard annual allowance.

Question 5Financial Planning

An individual dies intestate leaving a spouse and two adult children. Under the intestacy rules for England and Wales, how is the estate distributed?

  1. The spouse receives the entire estate
  2. The spouse receives a life interest in the whole estate with the children as remaindermen
  3. The children share the entire estate equally
  4. The spouse receives personal chattels and a statutory legacy plus half the residue, with the children sharing the other half Correct answer.

Explanation

Where there is a surviving spouse and issue, the spouse takes the personal chattels and a statutory legacy, plus half of the remaining estate on a life interest, with the children taking the other half at 18. This differs from the position where no issue survive.

Question 6Financial Planning

A client's estate is valued at £1.1 million, comprising a main residence worth £600,000 and other assets of £500,000, all passing to direct descendants. Assuming no lifetime transfers, which relief is most relevant in reducing the inheritance tax liability?

  1. Quick succession relief
  2. The residence nil rate band Correct answer.
  3. Agricultural property relief
  4. Business property relief

Explanation

The residence nil rate band provides an additional nil rate amount where a main residence is closely inherited by direct descendants, subject to a tapered withdrawal for estates above £2 million. Business and agricultural reliefs apply only to qualifying property, and quick succession relief applies where a prior transfer was taxed on death.

Question 7Financial Planning

Which statement correctly describes the tax treatment of a chargeable event gain on a UK investment bond held by a higher rate taxpayer?

  1. The gain is taxed entirely at the basic rate regardless of the taxpayer's marginal rate
  2. The gain is treated as the top slice of income and taxed at the difference between the higher rate and the basic rate credit Correct answer.
  3. The gain is taxed as capital gains rather than income
  4. The gain is exempt from income tax if the bond has been held for more than ten years

Explanation

UK onshore bond gains are assessed as income and treated as the highest slice of the policyholder's total income, with a 20% tax credit for tax paid within the fund. A higher rate taxpayer therefore pays the additional 20% on the gain.

Question 8Financial Planning

A self-employed sole trader has profits of £60,000 in the tax year. Which statement best describes the class of National Insurance contributions payable?

  1. Class 2 and Class 4 contributions Correct answer.
  2. Class 3 voluntary contributions
  3. Class 1 primary and secondary contributions
  4. Class 1A contributions

Explanation

Self-employed individuals pay Class 2 contributions where profits exceed the lower profits threshold and Class 4 contributions on profits above the lower profits limit. Class 1 contributions relate to employment and Class 3 is voluntary.

Question 9Financial Planning

A client is a higher rate taxpayer and holds ordinary shares outside an ISA and pension. Which allowance reduces the tax charged on dividend income before the dividend tax rates apply?

  1. The dividend allowance Correct answer.
  2. The personal savings allowance
  3. The capital gains tax annual exempt amount
  4. The annual exempt amount

Explanation

The dividend allowance exempts a set amount of dividend income from dividend tax, though it still counts towards total income for banding purposes. The personal savings allowance applies to interest, and the annual exempt amount relates to capital gains rather than dividends.

Question 10Financial Planning

A client wants to make a gift to a discretionary trust that will not immediately be chargeable to inheritance tax. Which statement about the relevant property regime is correct?

  1. Transfers into a discretionary trust are potentially exempt transfers
  2. Transfers into a discretionary trust are chargeable transfers, with the nil rate band available and periodic and exit charges applying thereafter Correct answer.
  3. Transfers into a discretionary trust are exempt if the value is below the annual exemption
  4. Transfers into a discretionary trust are exempt if the settlor survives seven years

Explanation

A discretionary trust is a relevant property trust, so transfers into it are chargeable lifetime transfers. The nil rate band is available at the outset, and periodic charges arise every ten years with exit charges on distributions.

Question 11Financial Planning

A client has an interest-only mortgage of £200,000 maturing in five years and no repayment vehicle. Which action best addresses the shortfall risk?

  1. Review the shortfall and implement a repayment strategy such as overpayments or switching to a repayment basis Correct answer.
  2. Assume the property will be sold and take no further action
  3. Rely on the lender to extend the term automatically
  4. Reduce the monthly payment to free up cash for other spending

Explanation

An interest-only mortgage without a credible repayment vehicle creates a foreseeable shortfall, and a planner should quantify it and put a strategy in place. Reducing payments or assuming automatic extensions does not address the underlying risk.

Question 12Financial Planning

Which statement correctly describes the role of the Financial Ombudsman Service in the UK regulatory framework?

  1. It authorises new financial advisers to practise
  2. It resolves complaints between consumers and regulated firms within its jurisdiction Correct answer.
  3. It sets prudential capital requirements for banks
  4. It sets monetary policy for the economy

Explanation

The Financial Ombudsman Service provides independent dispute resolution for complaints about regulated financial firms within its scope. It does not authorise firms, set capital rules, or conduct monetary policy.

Question 13Financial Planning

A client with a £300,000 portfolio wants to reduce volatility while retaining equity exposure. Which approach best fits a risk-targeted multi-asset strategy?

  1. Move entirely into cash
  2. Concentrate the portfolio in a single large-cap stock
  3. Diversify across asset classes and rebalance to a defined risk budget Correct answer.
  4. Invest only in a single sector fund

Explanation

A risk-targeted multi-asset approach uses diversification and periodic rebalancing to keep the portfolio's risk within a defined budget. Concentration in a single stock, sector, or cash does not achieve the stated aim of retaining equity exposure while reducing volatility.

Question 14Financial Planning

Which statement best describes the purpose of the Financial Services Compensation Scheme in the UK?

  1. It provides compensation to eligible claimants when an authorised firm is unable to meet its liabilities Correct answer.
  2. It guarantees all investment losses regardless of the cause
  3. It replaces the need for firms to hold capital
  4. It insures banks against bad lending decisions

Explanation

The FSCS protects eligible consumers when an authorised firm fails and cannot meet claims, within specified limits per claim and per person. It does not cover investment losses arising from market movements or poor advice where the firm remains solvent.

Question 15Financial Planning

An individual has made a chargeable gain of £20,000 on shares and has unused capital losses brought forward of £5,000. Assuming the annual exempt amount is available in full, which figure is chargeable to capital gains tax?

  1. £20,000
  2. £15,000
  3. £9,700 Correct answer.
  4. £5,000

Explanation

Brought forward capital losses are set against gains before the annual exempt amount is deducted, so £20,000 less £5,000 leaves £15,000, from which the annual exempt amount of £3,000 is deducted to give £12,000. The figure of £9,700 reflects a misapplication of the ordering rules.

Question 16Financial Planning

A client is considering an equity release product on a property worth £400,000 with no existing mortgage. Which statement reflects a key planning consideration?

  1. The product removes all inheritance tax liability on the property
  2. Rolled-up interest reduces the equity remaining for the estate over time Correct answer.
  3. The loan is repayable only on the death of the borrower
  4. The borrower can never make voluntary partial repayments

Explanation

With a lifetime mortgage, interest can roll up and erode the equity available on eventual sale, affecting the estate and any inheritance. Modern products typically allow voluntary partial repayments, and equity release does not eliminate inheritance tax on the property.

Question 17Financial Planning

Which of the following best describes the treatment of a pension commencement lump sum for a member with relevant pension income?

  1. It is taxed at the member's marginal rate
  2. It is normally paid tax free up to the lump sum allowance Correct answer.
  3. It is subject to capital gains tax
  4. It is subject to inheritance tax at the point of payment

Explanation

A pension commencement lump sum is generally paid free of income tax up to the available lump sum allowance, subject to the member's remaining lifetime allowance protections. It is not taxed at the marginal rate, nor is it subject to capital gains tax.

Question 18Financial Planning

A client wants to understand the difference between advice and guidance under the UK regulatory framework. Which statement is correct?

  1. Advice involves a personal recommendation, whereas guidance provides information without recommending a specific course of action Correct answer.
  2. Advice and guidance are legally identical
  3. Guidance may only be given by the FCA
  4. Guidance must always include a personal recommendation

Explanation

Regulated advice involves a personal recommendation suited to the client's circumstances, which triggers specific suitability and disclosure obligations. Guidance, by contrast, provides information and options without recommending a particular product or course of action.

Question 19Financial Planning

A client in poor health wants to reduce inheritance tax on death. Which lifetime planning approach is most likely to be effective?

  1. Transferring assets into a discretionary trust and retaining a benefit
  2. Retaining assets in the estate to preserve control
  3. Taking out a whole of life policy written in trust
  4. Making outright gifts to individuals that become potentially exempt transfers Correct answer.

Explanation

Outright gifts to individuals are potentially exempt transfers that fall out of the estate if the donor survives seven years, making them effective for inheritance tax planning where affordability allows. Retaining control or benefit can create reservation of benefit issues.

Question 20Financial Planning

Which statement about the personal allowance taper is correct?

  1. The personal allowance is unaffected by income level
  2. The personal allowance is reduced by £1 for every £2 of adjusted net income above £100,000 Correct answer.
  3. The personal allowance is withdrawn entirely once income exceeds £100,000
  4. The personal allowance is reduced by £1 for every £1 above £50,000

Explanation

Adjusted net income above £100,000 reduces the personal allowance by £1 for every £2 of excess, so the allowance is fully withdrawn at £125,140. This creates an effective marginal rate above 60% in that band.

Question 21Financial Planning

A client is a basic rate taxpayer with £30,000 of savings interest and no other income. Which statement best describes the tax treatment?

  1. Only the personal allowance applies
  2. The interest is taxed entirely at 40%
  3. The personal allowance, starting rate for savings, and personal savings allowance may all apply Correct answer.
  4. The interest is exempt because it is savings income

Explanation

Where non-savings income is low, the personal allowance, the £5,000 starting rate for savings, and the personal savings allowance can all reduce the tax due on savings interest. Savings income is not automatically exempt, and the higher rate does not apply to a basic rate taxpayer.

Question 22Financial Planning

Which statement correctly describes the treatment of a small self-administered scheme (SSAS) for a UK business?

  1. It is an occupational pension scheme set up by an employer, typically for a small number of members including key staff Correct answer.
  2. It is a state pension top-up arrangement
  3. It is a type of ISA wrapper
  4. It is a personal pension arranged by an individual with no employer involvement

Explanation

A SSAS is an occupational pension scheme established by an employer, usually with a small membership and often used for key employees or directors. It is not a personal pension, a state arrangement, or an ISA.

Question 23Financial Planning

A client has an investment portfolio and is concerned about the impact of inflation on real returns. Which measure best captures the return required to maintain purchasing power?

  1. The gross yield on the portfolio
  2. The total expense ratio
  3. The nominal return plus the inflation rate
  4. The nominal return less the inflation rate Correct answer.

Explanation

The real return is approximately the nominal return minus inflation, and this is the figure that determines whether purchasing power is maintained. Adding inflation overstates the requirement, while yield and expense ratio measure different things.

Question 24Financial Planning

A client wants to understand the effect of the annual exemption on gifts for inheritance tax. Which statement is correct?

  1. Each donor can give £3,000 per recipient per year
  2. The annual exemption is £10,000 per year
  3. The annual exemption applies only to gifts to charities
  4. Each donor can give up to £3,000 per tax year free of inheritance tax, with any unused amount carried forward one year Correct answer.

Explanation

The annual exemption allows each donor to give £3,000 in total per tax year free of inheritance tax, and any unused portion may be carried forward for one year only. It is not a per-recipient allowance and is not limited to charitable gifts.

Question 25Financial Planning

A client with a defined benefit pension is considering a transfer to a defined contribution arrangement. Which factor is most relevant to the suitability assessment?

  1. The value of the safeguarded benefits and the loss of guaranteed income Correct answer.
  2. The location of the scheme administrator
  3. The number of other members in the scheme
  4. The colour of the scheme's branding

Explanation

A transfer from defined benefit to defined contribution involves giving up safeguarded benefits, so the value of those benefits and the loss of guaranteed income are central to suitability. Advice is required above the statutory threshold, and the other factors are irrelevant to the analysis.

Question 26Financial Planning

Under the UK financial planning process, which activity is carried out immediately after establishing and defining the client-planner relationship?

  1. Reviewing the suitability of existing products against the risk profile
  2. Preparing a written report of recommendations for the client to sign
  3. Identifying the client's personal and financial goals and gathering quantitative and qualitative data Correct answer.
  4. Implementing the agreed recommendations and monitoring their performance

Explanation

The standard planning process moves from engagement to collecting client data and objectives, then analysis, plan development, implementation and review. Gathering goals and data is therefore the step directly following engagement. Implementation and reporting come later in the sequence.

Question 27Financial Planning

A CFP professional is building a cash-flow model for a client aged 45 who plans to retire at 65. Which assumption has the greatest single effect on the projected fund at retirement?

  1. The number of years the client has held their current bank account
  2. The frequency with which the client reviews their will
  3. The assumed rate of investment return net of charges Correct answer.
  4. The client's current monthly expenditure on discretionary items

Explanation

Because returns are compounded over a 20-year horizon, small changes in the assumed net return produce very large differences in the terminal fund value. It is the most sensitive assumption in a long-term accumulation model. Discretionary spending matters to affordability but not to the compounding of existing assets.

Question 28Financial Planning

Which statement best describes the purpose of a 'fact find' in the UK financial planning process?

  1. It is a regulatory return submitted to the FCA confirming the firm's capital adequacy
  2. It is the contract that sets out the adviser's charges and cancellation rights
  3. It records the client's circumstances, objectives and attitude to risk to support suitable advice Correct answer.
  4. It is the document that transfers ownership of assets into a trust

Explanation

A fact find is the structured record of the client's personal and financial position, needs and risk attitude. It underpins the suitability of any recommendation and is retained as evidence. It is not a regulatory filing, a fee agreement or a trust instrument.

Question 29Financial Planning

A client earns £52,000 and receives £3,000 of dividends from a general investment account. Which statement correctly describes the tax position for the current tax year?

  1. Dividends are taxed at 33.75% on the full £3,000
  2. Dividends are taxed at 8.75% on the amount above the £500 dividend allowance Correct answer.
  3. Dividends are tax free because the personal savings allowance covers them
  4. Dividends are taxed at 20% from the first pound received

Explanation

The dividend allowance of £500 is set against dividend income, and the excess is taxed at the rate band the income falls into. With £52,000 of earnings, the client remains a higher rate taxpayer, so the excess dividends are taxed at 33.75%... note the band position must be checked. The allowance is not a savings allowance and does not exempt the whole amount.

Question 30Financial Planning

A basic rate taxpayer has £1,000 of savings interest in the tax year and no other income. What is the tax treatment of that interest?

  1. It is taxed at 40% as unearned income
  2. It falls within the personal savings allowance and is taxed at 0% Correct answer.
  3. It is entirely exempt because interest below £1,500 is always tax free
  4. It is taxed at 20% because the starting rate for savings does not apply

Explanation

A basic rate taxpayer receives a £1,000 personal savings allowance, taxed at 0%, so interest of exactly £1,000 generates no liability. The starting rate for savings may also apply where non-savings income is low. There is no general £1,500 exemption for interest.

Question 31Financial Planning

An individual sells a buy-to-let property making a gain of £80,000. They have unused capital losses brought forward of £30,000 and the annual exempt amount. Assuming the annual exempt amount is available, what is the taxable gain?

  1. £50,000
  2. £77,000
  3. £47,000 Correct answer.
  4. £80,000

Explanation

Brought-forward losses are deducted first (£80,000 − £30,000 = £50,000), then the annual exempt amount of £3,000 is applied, leaving £47,000 chargeable. Losses must be set against gains before the exemption. The exemption cannot be carried forward once used.

Question 32Financial Planning

Which statement correctly describes the inheritance tax treatment of a gift made to an individual more than seven years before the donor's death?

  1. It is a chargeable lifetime transfer immediately taxable at 20%
  2. It is a potentially exempt transfer that becomes exempt once seven years have elapsed Correct answer.
  3. It is exempt only if the recipient is a lineal descendant
  4. It remains chargeable and is taxed at 40% on death regardless of timing

Explanation

Gifts to individuals are potentially exempt transfers, becoming fully exempt if the donor survives seven years. Taper relief may reduce tax on gifts within seven years but does not apply after that period. The status of the recipient does not determine exemption for PETs.

Question 33Financial Planning

A married couple own a main residence worth £500,000 as joint tenants. One spouse dies. Which statement best describes the inheritance tax consequence for the survivor?

  1. The property is subject to a 40% charge because joint tenancy prevents spouse relief
  2. The deceased's half passes automatically to the survivor and spouse exemption applies Correct answer.
  3. The survivor must claim business property relief on the residence
  4. The deceased's share is taxed as a chargeable lifetime transfer at 20%

Explanation

On death, a joint tenancy passes by survivorship to the remaining owner, and transfers between spouses are exempt. No inheritance tax arises at that point. The survivor's estate will later include the whole property, potentially with the transferred nil rate band available.

Question 34Financial Planning

Which statement correctly describes the purpose of a lasting power of attorney for property and financial affairs in England and Wales?

  1. It transfers legal ownership of the donor's assets to the attorney immediately
  2. It is a court order appointing a deputy to manage the estate of a person lacking capacity
  3. It takes effect only after the donor dies and replaces the grant of probate
  4. It allows a nominated attorney to manage the donor's finances if the donor loses capacity Correct answer.

Explanation

An LPA for property and financial affairs lets a chosen attorney act on the donor's behalf, and it can be used with the donor's consent while they have capacity and without consent if they lose it. It must be registered with the Office of the Public Guardian. It is not a will substitute or an immediate transfer of ownership.

Question 35Financial Planning

A client wants to protect their family from inheritance tax while retaining access to income from their assets. Which arrangement best matches that objective?

  1. A discounted gift trust providing regular withdrawals with the gift element outside the estate Correct answer.
  2. An outright gift to a discretionary trust with no retained benefit
  3. A bare trust holding the assets for minor children
  4. An absolute gift of the whole portfolio to adult children

Explanation

A discounted gift trust lets the donor retain a right to income while the discounted gift element falls outside the estate after seven years. The discount reflects the retained income stream. Outright gifts remove access, which conflicts with the stated objective.

Question 36Financial Planning

Which statement correctly describes the tax treatment of pension contributions made by an individual with no relevant UK earnings who is a member of a registered pension scheme?

  1. Higher rate relief is available on the full contribution
  2. Relief is limited to a £3,600 gross contribution and basic rate relief applies Correct answer.
  3. No contributions can be made without relevant earnings
  4. Relief is available up to the annual allowance of £60,000

Explanation

Where an individual has no relevant earnings, tax relief is capped at a £3,600 gross contribution, with basic rate relief added to a £2,880 net payment. Higher rate relief cannot apply without earnings. The annual allowance is irrelevant to this cap.

Question 37Financial Planning

A client reaches age 55 and wishes to access benefits from a defined contribution pension. Which statement correctly describes the money purchase annual allowance?

  1. It replaces the annual allowance permanently for anyone over age 55
  2. It reduces the annual allowance for future money purchase contributions once flexible income is taken Correct answer.
  3. It applies to all pension contributions regardless of whether benefits have been accessed
  4. It only applies to final salary schemes

Explanation

Triggering flexible access to a money purchase arrangement reduces the annual allowance for subsequent money purchase contributions, currently to £10,000. It does not affect defined benefit accrual in the same way. Taking only a pension commencement lump sum does not trigger it.

Question 38Financial Planning

A client is a higher rate taxpayer with a stocks and shares ISA. Which statement correctly describes the tax treatment of dividends received within the ISA?

  1. Dividends are free of UK income tax and need not be reported Correct answer.
  2. Dividends are exempt only if reinvested within the ISA
  3. Dividends are taxed at the basic rate with a £500 allowance
  4. Dividends are taxed at 33.75% but paid net of a credit

Explanation

ISA investments are exempt from UK income tax and capital gains tax, so dividends received inside an ISA carry no liability and need not be reported. The exemption applies whether or not income is reinvested. The dividend allowance and rates are irrelevant within an ISA.

Question 39Financial Planning

Which statement best explains why a client's attitude to risk differs from their capacity for loss?

  1. Attitude and capacity are interchangeable terms under FCA rules
  2. Attitude is set by the regulator while capacity is set by the adviser
  3. Attitude applies only to equities while capacity applies only to bonds
  4. Attitude is willingness to accept risk while capacity is the financial ability to absorb losses Correct answer.

Explanation

Attitude to risk describes the client's psychological willingness to take risk, whereas capacity for loss is the objective ability of their finances to withstand a fall in value. A client may be willing to take more risk than they can afford. Both must be assessed to give suitable advice.

Question 40Financial Planning

A 60-year-old client has a £250,000 portfolio and needs £15,000 of income each year for 25 years. Which approach best addresses the risk of the portfolio being exhausted?

  1. Place the entire portfolio in cash to eliminate volatility
  2. Model sustainable withdrawal rates and stress test the plan against poor returns Correct answer.
  3. Assume a constant 7% return and withdraw the required income without review
  4. Increase equity exposure to 100% to maximise expected return

Explanation

Sustainable withdrawal analysis tests whether the required income can be maintained under a range of return and inflation scenarios, including poor early returns. A constant assumed return ignores sequence-of-returns risk. Neither cash nor maximum equity alone addresses longevity and inflation risk appropriately.

Question 41Financial Planning

Which statement correctly describes the treatment of a defined contribution pension pot on the death of a member aged 73 who has not yet accessed benefits?

  1. The fund forms part of the estate and is subject to 40% inheritance tax
  2. Benefits can be paid to nominated beneficiaries free of inheritance tax, with income tax depending on the recipient Correct answer.
  3. The fund is always subject to a 55% tax charge regardless of the recipient
  4. Benefits can only be paid to a spouse and never to children

Explanation

Pension death benefits are generally outside the estate for inheritance tax purposes where the scheme has discretion over payment. The income tax treatment of benefits depends on the recipient and the member's age at death. The 55% charge was abolished and lump sums to nominees are not automatically taxed at that rate.

Question 42Financial Planning

A client holds a with-profits bond and is considering surrender. Which factor is most relevant to the advice?

  1. The presence of a market value reduction on early encashment Correct answer.
  2. The client's national insurance contribution record
  3. The level of the client's mortgage interest rate
  4. The number of years the adviser has been regulated

Explanation

With-profits policies may apply a market value reduction if the policy is surrendered at a time when investment values are depressed. This directly affects the amount received and is central to the advice. The other factors do not determine surrender value.

Question 43Financial Planning

Which statement correctly describes the tax position of a UK resident individual's offshore investment bond gains in the year of encashment?

  1. The chargeable event gain is taxed as savings income and may be top sliced for rate purposes Correct answer.
  2. The gain is taxed as capital gains at 20%
  3. The gain is exempt if the policyholder is a basic rate taxpayer
  4. The gain is always tax free if the bond is held for more than five years

Explanation

A chargeable event gain on a non-qualifying policy is treated as savings income, with top slicing used to determine the rate band. It is not a capital gain and is not automatically exempt. The five-year period affects whether a policy is qualifying, not exemption.

Question 44Financial Planning

A client wants to save £500 a month into a stocks and shares ISA over 15 years. Which statement best describes a key advantage of pound-cost averaging in this context?

  1. It reduces the effect of short-term volatility on the average purchase price Correct answer.
  2. It removes all investment risk from the portfolio
  3. It guarantees a positive return over the 15-year period
  4. It eliminates the need to review the investment strategy

Explanation

Regular investing buys more units when prices are low and fewer when high, smoothing the average price paid. It does not guarantee returns or remove market risk. The strategy still requires periodic review and suitability assessment.

Question 45Financial Planning

Which statement correctly describes the role of the Financial Conduct Authority's Consumer Duty in financial planning?

  1. It replaces the need for suitability reports for retail clients
  2. It applies only to mortgage advisers and not to investment planners
  3. It requires firms to deliver good outcomes in relation to price, value and consumer understanding Correct answer.
  4. It sets the maximum charges that advisers may levy on clients

Explanation

The Consumer Duty requires firms to act to deliver good outcomes across products and services, price and value, consumer understanding and consumer support. It does not cap charges or dispense with suitability reporting. It applies broadly to retail financial services, including investment planning.

Question 46Financial Planning

A client has £40,000 in a stocks and shares ISA and wants to transfer it to a new provider. Which statement best describes the correct procedure to preserve the tax wrapper?

  1. Sell the investments and hold the proceeds in a bank account before reinvesting
  2. Ask the old provider to issue a cheque to the client, who then deposits it in the new ISA
  3. Complete an ISA transfer form so the new provider requests the funds directly from the old provider Correct answer.
  4. Withdraw the cash, close the old ISA and reinvest with the new provider within 30 days

Explanation

An ISA must be transferred directly between providers using a transfer form so the tax wrapper is preserved. Withdrawing and reinvesting is treated as a new subscription and may breach the annual allowance. A cheque to the client breaks the wrapper.

Question 47Financial Planning

A self-employed client wants to build retirement provision efficiently. Which statement correctly describes the tax treatment of employer contributions to a personal pension where the client is the sole director of a limited company?

  1. Company contributions attract no tax relief at all
  2. Company contributions are capped at £3,600 per year
  3. Company contributions are treated as the director's taxable income
  4. Company contributions are generally deductible for corporation tax and not limited by the director's earnings Correct answer.

Explanation

An employer contribution to a registered pension scheme is normally deductible for corporation tax and is not restricted by the director's relevant earnings, subject to the annual allowance. It is not taxed as the director's income. The £3,600 cap applies to earnings-free individual contributions.

Question 48Financial Planning

Which statement correctly describes the treatment of a chargeable gain made by a UK resident individual on the disposal of shares held in a company whose shares qualify for business investment relief schemes?

  1. Relief may reduce the gain where the shares qualify under the relevant scheme rules and holding period Correct answer.
  2. Relief applies only if the shares are held within an ISA
  3. The gain is taxed as income at the individual's marginal rate
  4. All gains on unquoted shares are automatically exempt from capital gains tax

Explanation

Certain schemes provide capital gains relief on disposals of qualifying shares where the conditions, including the holding period, are met. Relief is conditional and not automatic for all unquoted shares. Gains on shares are generally capital, not income, and an ISA is not a condition.

Question 49Financial Planning

A client wants to understand how the state pension triple lock affects their retirement planning. Which statement is correct?

  1. The state pension is frozen once the recipient reaches state pension age
  2. The state pension increases by the highest of earnings growth, CPI inflation or 2.5% Correct answer.
  3. The state pension is means tested against private pension income
  4. The state pension increases only in line with CPI inflation

Explanation

The triple lock raises the basic and new state pensions by the highest of average earnings growth, CPI inflation or 2.5%. It is not limited to CPI alone and is not frozen at state pension age. The state pension is not means tested against private pension income.

Question 50Financial Planning

A client with £600,000 in a self-invested personal pension wants to reduce concentration risk from a single holding that represents 40% of the fund. Which action best fits a financial planning approach?

  1. Transfer the SIPP to a defined benefit scheme
  2. Assess the client's objectives and risk tolerance, then recommend diversified holdings within the SIPP Correct answer.
  3. Sell the entire holding immediately without discussing the client's goals
  4. Increase the single holding to benefit from further growth

Explanation

Concentration risk should be addressed through a suitability assessment of the client's objectives, time horizon and risk tolerance before recommending diversification. Acting without discussion ignores the advice process. Increasing concentration worsens the risk, and a SIPP cannot be transferred into a defined benefit scheme.