ACCA Advanced Taxation (ATX) Practice Exam

What happens to a gain on a chargeable asset if the proceeds are reinvested in EIS shares?

1. The gain is taxed immediately

2. The gain is deferred

3. The gain is exempt

4. The gain is doubled

The correct answer is: The gain is deferred

When a gain on a chargeable asset is reinvested in shares of a company under the Enterprise Investment Scheme (EIS), the gain is deferred. This is a key feature of the EIS, which is designed to encourage investment in small, high-risk companies by offering certain tax reliefs to investors. In this context, the capital gain that arises from the disposal of the chargeable asset does not trigger an immediate tax liability if the proceeds are used to acquire EIS shares. Instead, the tax is deferred until a later date, specifically until the EIS shares are disposed of or if the investor ceases to meet the EIS requirements. This deferral allows investors to reinvest their gains into foster new economic activity without the immediate burden of capital gains tax, promoting investment in qualifying businesses. The other outcomes provided do not accurately reflect the implications of reinvesting in EIS shares. For instance, immediate taxation or exemption does not apply under the EIS regulations as they specifically offer a mechanism for deferring gains rather than exempting them outright. Therefore, deferral remains the correct interpretation in this context.