ACCA Advanced Taxation (ATX) Practice Exam

If shares are sold at a gain, what happens to the income tax investment relief?

1. Half of it is retained

2. No relief is withdrawn

3. All tax investment relief is lost

4. A portion is rolled over

The correct answer is: All tax investment relief is lost

When shares are sold at a gain, particularly in the context of investment relief, the principle guiding the treatment of the tax relief is that if the investment has appreciated in value and is sold, the relief that was initially claimed will generally be lost. This means the taxpayer will need to account for the gain as part of their taxable income, and consequently, the previously received relief will be fully withdrawn. Investment reliefs, such as those offered under certain schemes designed to encourage investment, are contingent upon maintaining the investment for a set period. Upon the disposal of the investment at a gain, there is typically a provision that the relief is no longer applicable because the investment incentive is intended to support holding the investment rather than profiting from its sale. This adheres to the fundamental idea in tax law that reliefs are meant to encourage certain behaviors—in this case, maintaining investments for the long term. Therefore, when the investment is realized through a sale at a profit, the rationale for the relief disappears, leading to the loss of the tax investment relief claimed initially.