Moving a sole trade or partnership into a limited company is not simply an administrative change. For Capital Gains Tax purposes, business assets may be treated as transferred at market value, potentially creating gains even where little or no cash changes hands.
Incorporation Relief may defer some or all of those gains, but the statutory conditions must be met and the wider tax consequences should be reviewed before the transaction is completed.
When may Incorporation Relief apply?
Broadly, the relief may be available where:
- a business is transferred to a company as a going concern;
- the whole of the business assets transfers, although cash may be excluded; and
- the transferor receives shares in the company as all or part of the consideration.
It is important that a business is transferred, rather than merely a selection of assets. Whether an activity qualifies as a business can be fact-specific, particularly for property and investment activities.
How is the gain deferred?
Where the conditions are met, the qualifying gain is deducted from the amount that would otherwise form the CGT acquisition cost of the shares received.
This reduces the shares’ base cost. The deferred gain may therefore affect the CGT calculation when the shares are later sold or otherwise disposed of.
If the transferor receives cash or other non-share consideration as well as shares, part of the gain may remain immediately chargeable. The assumption of liabilities by the company can also affect the calculation and should be reviewed carefully.
Do you now need to make a claim?
The draft legislation and guidance applicable to the transfer date must be checked carefully. Under the new claim requirement, Incorporation Relief is no longer automatic for transfers within its scope. A valid claim must be made within the statutory time limit.
For a transfer during 2026/27, the proposed deadline stated in current editorial material is 31 January 2029. This date and the required claim procedure must be confirmed against the legislation and HMRC guidance in force before relying on it.
Missing a valid claim deadline could leave the gains arising on incorporation immediately chargeable.
Look beyond the immediate CGT result
Incorporation Relief is not always the best commercial or tax outcome. Before transferring the business, consider:
- the value of goodwill, property and other chargeable assets;
- any cash, director’s loan account or other consideration;
- liabilities taken over by the company;
- possible VAT, Stamp Duty Land Tax and capital allowance consequences;
- alternative CGT reliefs; and
- how profits and funds will be extracted from the company in future.
Bottom line
The structure of the transaction matters as much as the decision to incorporate. Valuations, consideration and documentation should be addressed before the business transfers, not reconstructed after the event.
This article provides general information and is not personalised tax or legal advice. Availability of relief depends on the specific facts and the rules in force on the transfer date.
How Naylor Accountancy Services can support you
Naylor Accountancy Services can help model the tax and cash-flow consequences of incorporation, review asset values and proposed consideration, coordinate the relevant tax registrations and returns, and compare the limited company structure with remaining a sole trader or partnership. Early planning can help business owners make the change with greater clarity and fewer unexpected liabilities.
Main office: 01892 807 001
Chichester office: 01243 776088
Bourne End office: 01628 530805
Email: [email protected]
F. Verification sources
The following primary sources should be checked in their versions applying on the date of transfer and the proposed publication date:
https://www.legislation.gov.uk/ukpga/1992/12/section/162, statutory basis for relief on the transfer of a business to a company
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65700p, HMRC’s technical guidance on the relief
https://www.gov.uk/business-relief-for-inheritance-tax, the correct live GOV.UK subject page should be located and checked, as GOV.UK page structures can change
https://www.gov.uk/self-assessment-forms-and-helpsheets, for the return and claim process applying to the relevant tax year
https://www.legislation.gov.uk/, to confirm the new claim requirement, commencement date, transitional rules and claim deadline
https://www.gov.uk/guidance/transfer-a-business-as-a-going-concern-vat-notice-7009, where the business transfer includes VAT-related assets and activities
https://www.gov.uk/stamp-duty-land-tax, where land, buildings or relevant liabilities form part of the transfer
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Published by The NAS News Team
