ACCA Advanced Taxation (ATX) Practice Exam

Regarding indexation allowance, when is it applicable for share pool shares?

1. On the same date as the sale only

2. Only on the previous 9 days prior to sale

3. Only on share pool shares

4. On every transaction within the year

The correct answer is: Only on share pool shares

Indexation allowance is a relief that allows taxpayers to adjust the acquisition cost of assets to account for inflation when calculating capital gains and losses. It is particularly relevant for shares that are held in a share pool. The correct choice highlights that indexation allowance is applicable specifically to share pool shares. This is because share pooling is a method used to track the acquisition costs of shares, especially in situations where shares are bought and sold over time, resulting in various costs associated with different purchases. In the context of the indexation allowance, only the acquisition costs of shares within this share pool are indexed to account for inflation, helping to ensure that the gain or loss on the sale of these shares reflects real economic performance rather than sheer nominal increases due merely to inflation. Therefore, indexation allowance does not apply to individual shares outside of this grouping, but rather to the collective pool of shares, making this choice correct. Other options may imply different applicability conditions for indexation that do not align with the specific treatment of share pool shares, thus emphasizing that the mechanism of indexation allowance is strictly tied to this particular method of tracking shares.