ACCA Taxation (F6) Practice Exam

What is the purpose of a joint election for gift holdover relief?

1. To defer the gain to the donor

2. To allow for immediate tax benefits

3. To defer the gain until the donee sells the asset

4. To transfer benefits to third parties

The correct answer is: To defer the gain until the donee sells the asset

A joint election for gift holdover relief is a specific mechanism in taxation that applies to gifts of capital assets. Its primary purpose is to allow for the deferral of capital gains tax liability until the recipient, or donee, subsequently sells the gifted asset. This means that instead of the donor having to realize and pay taxes on the gain at the time of the gift, the tax implications are effectively postponed until an eventual sale by the donee, at which point the appropriate tax can be accounted for based on the donee's circumstances. The reasoning behind this provision is to facilitate the transfer of assets without imposing an immediate tax burden on the donor. By allowing the gain to be deferred, it helps maintain liquidity for the donor and encourages intergenerational transfer of wealth without immediate tax consequences. It aligns with principles of capital taxation that aim to avoid penalizing individuals simply for passing on assets. In contrast, the other options do not suitably capture the essence of what joint election for gift holdover relief accomplishes. For example, deferring the gain to the donor implies that the donor would still be liable for taxation, which is not the case here. Immediate tax benefits misinterpret the mechanism by suggesting an upfront advantage rather than a deferral. Lastly, transferring