ACCA Advanced Taxation (ATX) Practice Exam

When calculating incorporation relief, what happens if consideration is partly in shares?

1. The full chargeable gain is immediately realized

2. The chargeable gain is deferred indefinitely

3. The chargeable gain is multiplied by the shares percentage

4. The shareholder loses the right to any relief

The correct answer is: The chargeable gain is multiplied by the shares percentage

When calculating incorporation relief and consideration is partly in shares, the correct approach is to multiply the chargeable gain by the percentage of shares received as consideration. This means that only a portion of the gain is subject to immediate tax, specifically the part that corresponds to the cash or other non-share consideration received. Under incorporation relief provisions, if a shareholder transfers assets to a company in exchange for shares, any gain is typically deferred to avoid immediate taxation. However, the deferral only applies to the portion of the gain attributed to the shares received. If there is cash or non-share consideration involved (i.e., a part of the payment is made in cash or other assets), then that portion of the gain must be realized and taxed immediately. This rule ensures that the tax impact corresponds appropriately to the form of consideration received. The correct calculation reflects the principle of deferring gains associated with the shares while expecting immediate tax obligations for any other forms of consideration. Therefore, allocating the gain based on the shares percentage correctly applies the statutory framework governing incorporation relief, making it a crucial aspect in determining potential tax liabilities.