ACCA Advanced Taxation (ATX) Practice Exam

In a SIP, what is the tax status of shares held for more than 5 years?

1. Exempt from income tax and capital gains tax

2. Subject to full tax charges

3. Subject to capital gains tax only

4. Exempt from capital gains tax only

The correct answer is: Exempt from income tax and capital gains tax

In the context of a Share Incentive Plan (SIP), shares that are held for more than five years are indeed exempt from both income tax and capital gains tax. This tax advantage encourages long-term investment within the scheme, aligning with the objectives of SIPs to incentivize employees by allowing them to share in the success of the company. To elaborate, under the provisions of a SIP, participants typically receive shares with certain tax benefits, one of which is the exemption from capital gains tax when the shares are held for the requisite period. Moreover, since employees do not incur income tax on the shares at the time of acquisition if certain conditions are met, this leads to the overall exemption from income tax as well. This incentive not only benefits the individuals participating in the SIP but also serves the broader goal of fostering employee retention and commitment, as employees are more likely to remain with the company knowing that they can benefit from the long-term growth of the value of their shares without the burden of immediate tax implications. The other options do not hold true in the context of a SIP with shares held for more than five years, emphasizing the unique benefits that the SIP regime offers to its participants.