ACCA Taxation (F6) Practice Exam

What is the immediate chargeable gain when not all proceeds are used for a new asset under rollover relief?

1. Actual gain on asset

2. Cash retained after investment

3. The higher of actual gain or cash retained

4. The lower of actual gain or cash retained

The correct answer is: The lower of actual gain or cash retained

Under rollover relief, when a taxpayer disposes of an asset and reinvests the proceeds in a new asset, any chargeable gain can be deferred. However, if not all of the proceeds are reinvested, there may be an immediate chargeable gain. In this context, the immediate chargeable gain when not all proceeds are used for a new asset is determined by the lower of the actual gain or the cash retained after investment. This is because the taxpayer is allowed to roll over only the part of the gain that corresponds to the reinvested amount. If cash is retained, it represents a realized gain to the extent that it exceeds the reinvestment. Therefore, the chargeable gain is limited to the lesser amount, ensuring that the portion of the gain that is deferred corresponds only to the investment in the new asset. The lower of the actual gain or cash retained is appropriate because it reflects the principle of not allowing a complete deferment of gains when not all proceeds are reinvested, ensuring that taxation aligns with the actual economic benefit received in cash.