ACCA Taxation (F6) Practice Exam

What does gift holdover relief entail?

1. Immediate taxation on donee

2. Gain is taxed at the time of transfer

3. Gain is deducted from MV of asset transferred to adjust base cost

4. Gain is recognized fully at market value

The correct answer is: Gain is deducted from MV of asset transferred to adjust base cost

Gift holdover relief is a provision that allows the person making a gift of an asset to defer any capital gains tax that would otherwise arise from the transfer. Instead of the gain being immediately taxed, the relief allows the gain to be "held over" until a later date. When the asset is given as a gift, the gain made by the donor is not taxed at the time of the transfer. Instead, the basis or cost of the asset in the hands of the donee (the recipient of the gift) is adjusted. Specifically, the gain that is deferred is deducted from the market value of the asset transferred. This means that the donee will take on the donor's cost basis, plus any gain that was deferred, for future calculations when they eventually sell the asset. This option is particularly helpful in maintaining the continuity of the tax exposure associated with the asset, allowing the donee not to have to pay immediate capital gains tax but instead to inherit the tax obligations when they eventually sell the asset. This concept is vital in understanding how asset transfers can be managed tax-efficiently, particularly in situations where individuals wish to transfer wealth without incurring immediate tax liabilities. Other choices reflect concepts that do not align with the mechanics of gift holdover relief