Key facts
- Transferring assets to your company is a disposal at market value for CGT, as you and the company are connected persons.
- Incorporation relief (s.162) can defer the entire gain into the base cost of the shares received.
- Holdover relief (s.165) can defer gains on individual business assets transferred.
- Companies can no longer amortise goodwill acquired from a related individual (5%+ shareholder) after 3 December 2014.
- Stamp Duty Land Tax applies at market value on property transfers to a connected company.
Why Incorporate?
Many sole traders and partnerships choose to incorporate as a limited company for reasons including limited liability, tax efficiency (Corporation Tax rates vs income tax rates), pension planning, and commercial credibility. However, the process of transferring assets from the individual to the company triggers CGT considerations.[2]
CGT on the Transfer
When you transfer your business to a company, you are disposing of assets to a connected person (since you control the company). This means the disposal is treated as being at market value, regardless of any actual consideration paid.[2]
Every chargeable asset you transfer is a separate disposal:
| Asset | CGT Position |
|---|---|
| Goodwill | Gain on full market value (base cost nil if self-generated) |
| Property | Gain on market value less original cost and improvements |
| Plant & machinery | Balancing charge (income, not CGT) via capital allowances |
| Intellectual property | Gain on market value less cost |
| Stock | Trading income (at cost or market value election) |
| Cash & debtors | No CGT consequence |
Reliefs Available
Three main reliefs can reduce or defer the CGT charge on incorporation:
1. Incorporation Relief (s.162 TCGA)
This is the primary relief and applies automatically when:[1]
- The business is transferred as a going concern
- All assets (other than cash) are transferred
- The consideration includes shares in the company
The gain is deferred by reducing the base cost of the shares received. If consideration is part shares and part other (e.g. a director’s loan), the relief is restricted proportionally.
2. Holdover Relief (s.165 TCGA)
An alternative to s.162, holdover relief can be claimed on individual business assets. The gain is deferred into the company’s base cost of each asset (rather than into the shares). This may be preferable if the company intends to sell assets soon, as it avoids a double tax charge.
3. Business Asset Disposal Relief (BADR)
Instead of deferring, you can choose to crystallise the gain and pay CGT at 10% (using BADR). This may be attractive if:
- You have BADR lifetime limit available
- You want to establish a higher base cost for the shares (reducing future CGT on share disposal)
- The gain is within or close to the £1m BADR limit
Choosing the Right Strategy
| Strategy | CGT Now | Future Position | Best For |
|---|---|---|---|
| Incorporation relief (s.162) | £0 | Low base cost shares — larger future gain | Long-term shareholders |
| Holdover relief (s.165) | £0 | Low base cost in company — company pays more on disposal | Where company will sell assets |
| BADR (crystallise gain) | 10% on gain | Higher base cost shares — smaller future gain | Planning to sell company soon |
Tip: If your total gain on incorporation is within the £3,000 Annual Exempt Amount, the gain is tax-free regardless of which relief you use. In that case, it may be better to crystallise the gain and establish a higher base cost.
The Goodwill Trap
Since 3 December 2014, goodwill transferred to a company by a related party (holding 5%+ of the shares) cannot be amortised by the company for Corporation Tax purposes. This means:[2]
- The company gets no ongoing tax benefit from the goodwill
- The individual has deferred their CGT (via incorporation relief) but created a future charge
- The company has goodwill on its balance sheet that provides no tax relief
For many small businesses, the combined impact of deferred CGT (eventually payable on share disposal) and no CT amortisation relief makes the goodwill element of incorporation less tax-efficient than it once was.
Stamp Duty Land Tax
If the business includes land or property, transferring it to the company triggers SDLT at market value (because the transfer is between connected persons). This is an actual cash cost that cannot be deferred:[3]
- Commercial property SDLT rates apply (up to 5% on the portion above £250,000)
- Residential property rates may apply if the property has any residential element
- The 3% surcharge for additional dwellings applies if the company acquires residential property
Alternative: Some business owners choose to retain property personally and lease it to the company. This avoids the SDLT charge on incorporation, though it creates a landlord/tenant relationship and the rental income is taxed on the individual.
VAT: Transfer of a Going Concern
If the business is VAT-registered, the transfer of the business as a going concern (TOGC) is outside the scope of VAT, meaning no VAT is charged on the transfer. However, the new company must be (or become) VAT-registered and continue the same kind of business.
Frequently Asked Questions
Do I have to pay CGT when I incorporate my business?
Not necessarily. If you transfer the entire business as a going concern in exchange for shares, incorporation relief under s.162 can defer the gain. Alternatively, you can claim holdover relief under s.165 on individual business assets. Without these reliefs, the transfer would trigger a CGT charge on the market value of all chargeable assets.
Should I use incorporation relief or holdover relief?
It depends on your circumstances. Incorporation relief is automatic and defers the gain into the shares (useful if you plan to hold the shares long-term). Holdover relief is claimed on each asset and defers the gain into the company’s base cost (useful if the company is likely to sell assets). You cannot use both on the same disposal.
Can I claim BADR on incorporation?
Yes, but only if you choose not to use incorporation relief or holdover relief. You might deliberately crystallise the gain (by disapplying s.162) and pay CGT at 10% via BADR, especially if you have BADR lifetime limit remaining and want to establish a higher base cost for the shares.
What are the stamp duty costs of incorporation?
If you transfer land or property to the company, SDLT is charged at market value (because you and the company are connected persons). This can be a significant cost. Goodwill transfers do not attract stamp duty, but transfers of shares in other companies attract 0.5% stamp duty.
Further Reading
- Incorporation Relief (s.162) — detailed guide to s.162 TCGA
- Holdover Relief (Gift Relief) — the alternative deferral relief
- Goodwill & Intangible Assets — goodwill valuation and the related party restriction
- Business Asset Disposal Relief — claiming 10% on incorporation
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