Friday Five Focus on Taxation – 5 Questions in 5 Minutes – 25 Sep 2026

Friday Five Focus on Taxation – 5 Questions in 5 Minutes Every Friday

What’s this all about?

Each week, we ask questions relating to one of these topics: Investments, Taxation, Pensions, Protection, or Regulation. This week, our Friday Five is relevant to Taxation; this is useful as you prepare for the CII’s R03 or AF1 exams. The challenge is for you to answer them in 5 minutes. Answers at the bottom of the page.

Questions

IMPORTANT! These questions relate to examinable tax year 2026/27, examinable by the CII until 31 August 2027.

1. Charlie sets up a discretionary trust in this tax year for his grandchildren for £425,000. He has already used his annual exemptions. How much Inheritance Tax (IHT) will be payable assuming Charlie pays it when he sets up the trust?
   1. £40,000
   2. £25,000
   3. £20,000
   4. £10,000

2. Kayleigh, an additional-rate taxpayer, Jo a higher-rate taxpayer and Edna, a non-taxpayer, have all received a £1,000 interest distribution from their unit trust investment. None of them has any other savings or dividend income. With regards to these payments, which of the following statements are true? (Tick all that apply.)
   1. Only Kayleigh will pay tax on the full £1,000.
   2. Only Edna can arrange to have her distribution paid gross.
   3. Any unused dividend allowance can be offset against the payment.
   4. Jo’s tax bill will be £200, whereas Kayleigh’s will be £450.

3. James incurs the following expenses on his rental property. Which of the following is an allowable expense against his rental income?
   1. Plumber’s charge to repair the shower.
   2. Capital repayments on his mortgage payments.
   3. An extension to the side of the house.
   4. An upgraded kitchen and bathroom.

4. Lenny owns an 80% share in the family company and on his daughter Freya’s 21st birthday gives her a 20% shareholding. Instead of paying Capital Gains Tax (CGT) on the gain of £50,000 he has made, Lenny instead claims holdover relief. What is the impact of this course of action?
   1. There is no impact on Freya, but if she disposes of the shares, Lenny will then have to pay the outstanding CGT.
   2. Holdover relief extinguishes Lenny’s CGT liability, and Freya acquires the shares at the value at the time they are transferred to her.
   3. There is no impact on Freya, but if she disposes of the shares, Lenny will then have to pay the CGT but at the reduced holdover rate of 10%.
   4. Freya acquires the shares at Lenny’s acquisition cost, and if she disposes of the shares, her gain will include Lenny’s gain of £50,000.

5. Steve has created six discretionary trusts over his lifetime, one of which has made a gain of £10,000 on the sale of an investment. What annual exempt amount for Capital Gains Tax purposes can the trustees use against this gain?
   1. £3,000
   2. £1,500
   3. £300
   4. £250

Answers

1. B; See R03 Study Text, Chp 4; Rationale: Where the settlor pays the immediate charge to IHT, the CLT has to be grossed up. For a net gift of £425,000 the tax is calculated as ¼ of the excess over the nil rate band. £425,000 – £325,000 = £100,000. £100,000 x ¼ = £25,000. An alternative way of looking at this is to charge the excess at 25% rather than the 20% that would apply if the trustees paid the bill.
2. AD; See R03 Study Text, Chp 10; Rationale: Only Kayleigh will pay tax on the full £1,000 because she does not benefit from a personal savings allowance (PSA). Jo will get a £500 PSA and Edna is a non-taxpayer so does not pay tax anyway. Everyone will receive their distribution gross, not just Edna. It is the PSA, not the dividend allowance, that is available on interest distributions from unit trusts. Jo’s tax bill is £1,000 – £500 PSA = £500 @ 40% = £200. Kayleigh’s is £1,000 @ 45% = £450.
3. A; See R03 Study Text, Chp 9; Rationale: Only ongoing expenses are allowable against rental income. So, while the plumber’s repair charge is permissible, the others are all examples of enhancement costs and are therefore not allowable.
4. D; See R03 Study Text, Chp 3; Rationale: When holdover relief is claimed, the recipient of the gift (Freya, in this case) acquires the shares at the donor’s (Lenny’s) acquisition (buying) cost. So, when Freya finally sells or gives away the shares, her gain will include Lenny’s gain of £50,000. There is no reduction in the rate of CGT payable.
5. C; See R03 Study Text, Chp 3; Rationale: The maximum CGT annual exempt amount (AEA) for most trusts is ½ of the ordinary CGT AEA, i.e. £3,000/ 2 = £1,500. If more than one trust has been set up, the AEA is shared between them, down to a minimum of 1/5th. The trustees therefore have an AEA of £300, i.e. 1/5th of £1,500.

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R03 questions often come down to applying the rules correctly and avoiding small but costly errors. If you’d like to see how our full R03 E-Mocks present these topics in an exam setting, get access to the free R03 E-Mocks taster to preview the question style, layout and level of detail included in the complete set.

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