How to Do These Common Calculations in the CII R03 Exam

When it comes to the CII R03 exam (Personal Taxation), candidates will, of course, be expecting to do calculations. They can, at the very least, anticipate the following calculations: Income Tax, Capital Gains Tax, Inheritance Tax, Taxation of Investment Bonds, and Taxation of Investments. In this article, we cover two calculations that could come up in your exam.

Let’s start with income tax.

An Income Tax Calculation

Joshua is aged 40 and has earnings in this tax year of £115,000.  What is his total liability to Income Tax?

A. £33,500

B. £36,500

C. £38,500

D. £44,000

One of the criticisms of R03 has always been about the timing. The exam is just 1 hour long, and, in that time, candidates have 50 questions to answer – 39 standard-format and 11 multiple-response.  Some of the questions are very wordy, and it is a challenge completing them all in the time given, so it is important for candidates to realise straight away the point being tested.

In this question, we are told that Joshua has earnings of £115,000. Candidates should straight away realise this means that he will lose some of his personal allowance, due to his income being over £100,000 with the reduction calculated as £1 for every £2 over the threshold.

The calculation therefore is: £115,000 – £100,000 = £15,000 / 2 = £7,500.

This is the amount that is deducted from his personal allowance of £12,500 leaving him with an amount of £5,000.

We then start again and take £5,000 from his earnings of £115,000 leaving us with £110,000 of taxable income. £37,500 of this is taxable at the basic rate of 20% (£7,500), and the remainder of £72,500 is taxable at the higher rate of 40% (£29,000). Therefore £7,500 + £29,000 = £36,500 meaning the answer is B.

The next calculation we will cover is an IHT question relating to trusts.

An Inheritance Tax Calculation

Gail has set up a discretionary trust for her grandchildren for £400,000.  Assuming she has a full nil rate band available and has NOT made any previous transfers, how much IHT will be payable assuming the trustees pay the tax?

A. £30,000

B. £15,000

C. £14,400

D. £13,800

With this type of question, candidates must remember the annual allowance.  The question will always indicate whether this can be deducted or not.  In this question, we are told that Gail has not made any previous transfers, so we can use it in this calculation.  The other piece of important information is that the trustees will pay the tax; this is important because if we had been told the settlor would pay, then the answer would have been different.

Where the trustees pay the tax due on a chargeable lifetime transfer, the charge is 20% of the excess over the nil rate band.  First, though, we deduct the two annual exemptions (remember the one from the previous year can be carried forward), so from £400,000, we can deduct £6,000 leaving us with £394,000. From this figure, we deduct the nil rate band of £325,000 leaving us with £69,000. This figure is then multiplied by 20% (as the trustees are paying), which gives us the answer of D, £13,800.

You should note that if the question states that the settlor was paying the tax, then the transfer must be grossed up, and the answer multiplied by 20%.  More simply, we can use 25% instead of 20%, which gives the same result as follows:

£69,000 grossed up by 20% = £86,250 x 20% = £17,250

or

£69,000 x 25% = £17,250

These calculations, as well as the other most common ones, should be practised (and then practised again) before exam day to ensure that, as soon as the question appears, you know how to tackle it.

Remember also that as much as the multi-response questions are challenging, it is worth remembering that MOST of the time, only two of the options given are correct.  The latest R03 exam guide shows that out of the 11 multi-response questions, 9 of them have just two correct answers, and just two of them have three correct options. Another welcome relief is that none of the questions, in the guide at least, has more than four options to choose from, whereas the guide itself states that between four and six options could be given. With candidates having to select all the correct options to gain the mark, it would be reassuring if that were the case in the actual exam as well.

Grab the resources you need!

If you’re studying for your CII R03 exam, and you don’t want to waste precious time figuring out the calculations, you’ll need to be well prepared. Grab our free taster to try out one of Brand Financial Training’s calculation workbooks for yourself.  Click the link to download the R03 calculation workbook taster now!