ACCA Advanced Taxation (ATX) Practice Exam

What tax implications occur for shares withdrawn from a SIP within three years?

1. Only capital gains tax applies

2. Income tax and NICs apply on the market value of shares

3. They are completely tax-exempt

4. A flat tax rate applies regardless of holding period

The correct answer is: Income tax and NICs apply on the market value of shares

When shares are withdrawn from a Share Incentive Plan (SIP) within three years, the individual typically faces tax implications primarily related to income tax and National Insurance Contributions (NICs) on the market value of the shares at the time of withdrawal. This is due to the fact that SIPs are designed with specific tax advantages, but those advantages may be forfeited if the shares are not held for the required minimum period of three years. Under the tax rules governing SIPs, if shares are taken out before the three-year holding period is completed, the individual is considered to have received employment income equivalent to the market value of those shares, which then becomes subject to income tax and NICs. This treatment helps to ensure that the tax benefits imposed by the SIP arrangement are only realized if the shares are maintained for the appropriate duration. In contrast, the other options present scenarios that do not accurately reflect the tax treatment for shares withdrawn from a SIP within that time frame. A focus on capital gains tax alone would not be applicable here since income tax and NICs take precedence in the situation where the shares are withdrawn prematurely. Similarly, the notion that shares are completely tax-exempt overlooks the income tax implications associated with early withdrawal, and the idea of a flat