ACCA Advanced Taxation (ATX) Practice Exam

In a takeover scenario, what qualifies as a 'small' cash element when shares are involved?

1. Less than 10% of the total value

2. Less than 5% of the total value

3. Less than £1,500

4. Less than £3,000

The correct answer is: Less than 5% of the total value

In the context of a takeover scenario, the term 'small cash element' is typically defined by thresholds set out in tax legislation, particularly under capital gains tax rules. The correct answer identifies that a cash element that is less than 5% of the total value of the transaction qualifies as 'small'. This definition is significant because it influences how capital gains tax is applied during the takeover process. When the cash element is deemed 'small', it can affect the treatment of the transaction for tax purposes, specifically concerning any potential reliefs that may apply, such as share-for-share exchange relief. For instance, if the cash received exceeds this 5% threshold, it may result in a different tax treatment, potentially leading to capital gains tax liability on the gain attributable to the cash portion. By setting the limit at 5%, tax legislation aims to minimize the administrative burden on taxpayers and tax authorities for small cash transactions, as they are less likely to materially impact the value of the shares exchanged in the takeover. The other thresholds, whether it's less than £1,500 or £3,000, do not accurately capture the legislative definition of a 'small cash element' in a takeover situation as directly related to the percentage of total value. This percentage approach