ACCA Advanced Taxation (ATX) Practice Exam

How are shares taxed when sold as part of a SIP after three years?

1. Taxed under capital gains only

2. Exempt from taxation

3. Taxed under income tax and capital gains tax

4. Only income tax applies

The correct answer is: Exempt from taxation

When dealing with the taxation of shares sold as part of a Share Incentive Plan (SIP), it is important to understand how these plans work, especially in relation to the tax treatment of shares after a specific holding period, which in this case is three years. SIPs are an employee share scheme that allows employees to acquire shares in their employer company without incurring an immediate tax liability. Under current UK tax legislation, if shares are held in a SIP for a minimum of three years, any gains made on the sale of those shares are exempt from capital gains tax. This is a significant advantage of SIPs, which is designed to encourage employees to invest in the company's shares while enjoying favorable tax treatment. This exemption from taxation after three years of holding reflects the intention of SIPs to be a long-term investment strategy for employees, thereby promoting employee ownership and investment in their employers. Thus, shares sold as part of a SIP after meeting the three-year requirement are indeed exempt from capital gains tax, resulting in no taxation liability once they are sold. It is also crucial to note that the other choices do not reflect the current tax regulations concerning SIPs. For example, shares sold under different conditions might be subject to other tax treatments involving capital gains or