ACCA Taxation (F6) Practice Exam

When should capital gains losses brought forward be utilized?

1. Before the annual exempt amount is applied

2. After the annual exempt amount

3. After income tax has been deducted

4. They are wasted

The correct answer is: After the annual exempt amount

Utilizing capital gains losses brought forward is essential for effectively calculating the overall capital gains tax liability. The correct approach is to apply these losses after determining the annual exempt amount. The annual exempt amount provides taxpayers with a certain level of gains that are free from tax. Once this exemption is applied, any remaining gains can be offset by brought forward losses, thereby reducing the taxable capital gains for the period. This sequence maximizes the benefit of any losses, as it permits the taxpayer to use the losses against the amount subject to tax rather than reducing the exempt portion. In contrast, applying carried forward losses before this exemption would diminish the value of the losses since they would offset amounts that do not incur tax. As a result, any potential tax liability would remain unmitigated by these losses when they could have been used more effectively against taxable gains after the annual exempt amount. This understanding is crucial in capital gains tax planning and helps ensure that taxpayers utilize their losses to their maximum benefit according to current tax regulations.