ACCA Taxation (F6) Practice Exam

In the case of sale at undervalue under gift holdover relief, what does the donor realize?

1. Gain based on actual proceeds minus original cost

2. Gain equal to the original cost of the asset

3. No gain regardless of sale price

4. Only the market value of the asset

The correct answer is: Gain based on actual proceeds minus original cost

In the context of gift holdover relief, the donor realizes a gain based on the actual proceeds received from the sale of the asset minus the original cost of that asset. This principle is important in cases where the asset has been sold at undervalue; the donor is still considered to have made a sale that generates a gain equal to the difference between the proceeds received (no matter how low) and the original cost. This treatment reflects the core intention of gift holdover relief, which aims to defer the tax liability on the gain rather than completely eliminate it. The gain realization measures the economic benefit derived from the transaction while allowing the recipient of the gift to "step into the shoes" of the donor for capital gains tax purposes. The other options do not accurately depict the realization of gain by the donor in this scenario. For instance, simply stating that there is no gain regardless of sale price does not consider the actual financial outcome of the transaction, and asserting that the gain equals the original cost overlooks the principle of recognizing a gain based on the difference between proceeds and cost. The market value of the asset is not relevant to the calculation of gain in this instant sale at undervalue, as it is the actual proceeds received that determine the gain.