ACCA Advanced Taxation (ATX) Practice Exam

What is the base cost of shares for CGT under the EMI scheme?

1. Market value at grant time only

2. Price paid plus any discount taxed as income on exercise

3. Zero if they are free shares

4. Their value at the time of sale

The correct answer is: Price paid plus any discount taxed as income on exercise

The base cost of shares for Capital Gains Tax (CGT) under the Employee Management Incentive (EMI) scheme is determined by the price paid for the shares, which includes any discount that is taxed as income upon exercise. This is because when employees exercise their options under the EMI scheme, they often pay a price for those shares, which constitutes their initial cost basis. Moreover, if there is a discount on the shares valued at market price, that discount is considered taxable income at the time of exercise. Hence, both the amount paid and the taxable discount need to be factored into calculating the base cost for CGT purposes. Choosing this option accurately reflects the treatment of shares under the EMI scheme, ensuring that the cost basis is recognized properly in the context of capital gains tax calculations. This captures the critical elements of the scheme, as employee share options are typically structured to balance the payment amount with the potential for capital gains in the future.