ACCA Advanced Taxation (ATX) Practice Exam

What involves the disapplication of share for share exchange relief?

1. The elimination of capital gains tax on share trades

2. Ceremonial processes for share exchanges

3. Crystallizing a gain on shares at the time of takeover

4. It is applicable to all share exchanges without exceptions

The correct answer is: Crystallizing a gain on shares at the time of takeover

The correct answer pertains to the concept of crystallizing a gain on shares at the time of a takeover. In the context of share for share exchange relief, when a company takes over another company, shareholders may exchange their shares in the acquired company for shares in the acquiring company. This type of exchange is designed to defer any capital gains tax that would normally arise from selling the shares. However, if the relief does not apply (which can happen in certain circumstances), the exchange could lead to the crystallization of a gain on shares, meaning that the shareholder would have to recognize a gain for tax purposes at the time of the takeover. This can occur when the specific conditions for relief are not met, prompting an immediate tax impact. Understanding this aspect of share for share exchange relief is crucial, as it underscores the importance of assessing the nature of the share exchange and the eligibility for relief under relevant tax laws.