ACCA Advanced Taxation (ATX) Practice Exam

What are the conditions for an individual to qualify for capital treatment under own share purchases?

1. He must be a director of the company.

2. He must own shares for at least five years.

3. He must own more than 30% of the company after the buyback.

4. He must have inherited the shares recently.

The correct answer is: He must own shares for at least five years.

The conditions for an individual to qualify for capital treatment under own share purchases focus on the criteria that define the nature of the shareholding and the length of time the shares have been held. Specifically, the requirement to own shares for at least five years is key for establishing that the shareholding has been investment-oriented rather than speculative. This long holding period generally indicates that the shares are part of a long-term stake in the company, which is significant in determining the tax treatment on the proceeds received from the sale or buyback of those shares. Holding shares for a sufficiently extended period can influence whether the gains from disposals are treated as capital gains, which are usually taxed at a more favorable rate than income gains. Thus, fulfilling this ownership criterion helps reinforce the argument for capital treatment in the context of share buybacks. The other options do not specifically align with the main requirement for capital treatment. For instance, simply being a director or having recently inherited shares doesn't automatically qualify for the beneficial capital gains tax treatment. Furthermore, owning more than 30% of the company post-buyback, while potentially relevant, does not relate to the critical five-year holding period that ensures the individual is recognized as making a long-term investment in the company.