ACCA Taxation (F6) Practice Exam

What defines a depreciating replacement asset in the context of rollover relief?

1. Asset that loses value over time due to usage

2. Asset that appreciates over time

3. Asset with no impact on capital gains

4. Asset that is improved continuously

The correct answer is: Asset that loses value over time due to usage

In the context of rollover relief, a depreciating replacement asset is defined as an asset that loses value over time due to usage. This concept is essential in tax legislation, particularly to understand how capital gains tax is applied when a qualifying asset is sold and replaced with a new asset. When an asset is depreciating, it typically indicates that its economic value decreases as it is used in business or due to wear and tear. Rollover relief allows for the deferral of capital gains tax liability when a taxpayer disposes of a qualifying asset and reinvests in another asset of a similar kind. The asset acquired is considered a replacement for the one disposed of, hence the term "rollover." This mechanism is designed to support businesses by allowing them to reinvest without immediate tax consequences, facilitating growth and sustained investment. The understanding of depreciating assets is crucial because it aligns with the financial realities of business asset management and the strategic replacement of assets to maintain or enhance operational capabilities. Other options, such as appreciating assets or those that have no impact on capital gains, do not properly reflect the principles of rollover relief as they either do not lose value over time or are not involved in the capital gains framework in the same way. Similarly, assets that are