ACCA Advanced Taxation (ATX) Practice Exam

Which investments are particularly beneficial for higher-rate taxpayers seeking tax-free growth?

1. High-risk stocks that fluctuate daily.

2. Standard deposit accounts with fixed interest rates.

3. Investments in stocks not producing dividend income.

4. Income-generating assets held within ISAs.

The correct answer is: Income-generating assets held within ISAs.

For higher-rate taxpayers looking for tax-free growth, investments in income-generating assets held within Individual Savings Accounts (ISAs) are particularly beneficial. ISAs are tax-efficient vehicles that allow individuals to save or invest without paying income tax or capital gains tax on the returns generated within the account. This means that all income, such as dividends and interest from investments held in ISAs, as well as any capital gains, can grow tax-free, effectively enhancing the after-tax return for investors in higher tax brackets. Investing in assets that produce income within an ISA allows higher-rate taxpayers to retain more of their returns, as they do not have to worry about the tax implications on their investment gains. This tax-efficient structure is especially advantageous for those in higher tax brackets who would normally be subject to higher rates on investment income outside of an ISA. In contrast, high-risk stocks that fluctuate daily may involve significant capital growth potential but do not guarantee tax-free growth, as any realized gains would still be subject to capital gains tax outside an ISA. Likewise, standard deposit accounts with fixed interest rates generate taxable interest income, which would not offer the same tax efficiency. Finally, investments in stocks that do not produce dividend income may not be inherently tax-free and can also miss