ACCA Advanced Taxation (ATX) Practice Exam

What action could an individual take regarding their quoted shares valued less than cost at the time of death, in relation to capital gains tax?

1. Hold onto the shares until after death

2. Sell the shares prior to death to realize accrued capital losses

3. Gift the shares to a family member

4. Transfer the shares to a trust

The correct answer is: Sell the shares prior to death to realize accrued capital losses

Selling the shares prior to death to realize accrued capital losses is a strategic action that could enable the individual to offset other capital gains for tax purposes. This option is particularly advantageous because, upon the death of an individual, the capital gains tax treatment changes. If the shares are still owned at the time of death, they may be subject to a step-up in basis, meaning that their value is adjusted to the market value at the date of death, thus potentially eliminating any capital gains tax liability on gains that occurred before the individual's passing. By choosing to sell the shares before death, the individual can lock in the capital losses and use them to offset any capital gains realized in the same tax year, thereby reducing the overall capital gains tax liability. This is especially useful if the individual has other investments that have appreciated in value, as the losses from the sale of these shares can help minimize taxes due. This option presents a proactive approach to tax planning, allowing the individual to take advantage of losses in their portfolio before the finality of death alters the way those investments are treated for tax purposes.