ACCA Advanced Taxation (ATX) Practice Exam

What happens to chargeable gains on incorporation if the consideration is comprised solely of shares?

1. The charges are incurred immediately

2. All gains are deferred

3. A chargeable gain must be reported

4. Only partial gains can be deferred

The correct answer is: All gains are deferred

When a business incorporating its activities transfers assets to the new company in exchange for shares, this situation triggers specific tax implications regarding chargeable gains. In this case, if the consideration received by the business owner is entirely in the form of shares, the gains that might otherwise need to be reported as taxable at the time of incorporation are typically deferred. This deferral means that the individual does not immediately incur a tax charge on the unrealized gains associated with the assets transferred; rather, the chargeable gains will only be recognized and taxed when the shares received are subsequently disposed of. The rationale behind this treatment is to facilitate business expansion and investment, allowing owners to reinvest in their business without immediate tax burdens that might otherwise deter incorporation. Thus, the option indicating that all gains are deferred accurately reflects this tax policy, enabling a smoother transition into corporate structure without current-year tax implications on the capital gains associated with the assets transferred.