ACCA Advanced Taxation (ATX) Practice Exam

Which of the following describes tax advantaged share option schemes?

1. Participants pay income tax on the exercise of options

2. Participants do not pay income tax or NIC on the purchase of shares at less than market value

3. Participants are guaranteed a minimum market value

4. Participants can only exercise options if they are fully vested

The correct answer is: Participants do not pay income tax or NIC on the purchase of shares at less than market value

Tax advantaged share option schemes are designed to provide employees with opportunities to acquire shares in their company under favorable tax conditions. The correct choice indicates that participants do not incur income tax or National Insurance Contributions (NIC) when they purchase shares at less than market value. This characteristic is vital because it incentivizes employees to invest in their company without the immediate financial burden of taxes associated with their acquisition of shares, making the scheme more attractive. The tax advantage primarily arises when the shares are issued under a qualifying scheme, helping employers attract and retain talent. In contrast, the other choices do not accurately capture the essence of such schemes. For instance, participants typically face tax liabilities upon selling the shares or experiencing significant events like market value increases, rather than at the time of exercise. Furthermore, there is no guarantee of a minimum market value of shares, and while vesting conditions often apply to option schemes, the requirement isn’t universally applicable since some schemes allow early exercise under certain conditions.