ACCA Advanced Taxation (ATX) Practice Exam

What is the base cost of shares for CGT in a SIP?

1. Cost at the time of purchase

2. Average market value during the holding period

3. Market value when the shares leave the plan

4. Market value on the date of distribution

The correct answer is: Market value when the shares leave the plan

In the context of a Share Incentive Plan (SIP), the base cost of shares for Capital Gains Tax (CGT) purposes is determined by their market value on the date the shares leave the plan. This means that when the shares are distributed to the employee, the value at that moment becomes the basis for calculating any future capital gains when the employee subsequently sells those shares. This approach ensures that employees are not taxed on gains that occurred while the shares were still within the SIP, providing a fair method of calculating CGT that reflects the actual economic situation of the employee at the time they gain full ownership and control over the shares. It also aligns with the treatment of shares in an incentive plan, where appreciation in value during the holding period is not subject to tax until a tangible transaction—such as a sale—occurs. By contrast, the other options address aspects that do not apply to the calculation of CGT base cost in a SIP. The cost at the time of purchase does not account for any changes in value over time. The average market value during the holding period fails to reflect the specific value at the point of distribution, and the market value on the date of distribution is actually the correct principle, but it is important to clarify that