Key facts
- Incorporation relief applies automatically under s.162 TCGA 1992 when conditions are met — no claim is required.
- All assets of the business (excluding cash) must be transferred to the company.
- The consideration must be wholly or partly in shares in the new company.
- The gain is deferred by reducing the base cost of the shares received.
- If any consideration is received in a form other than shares (e.g. cash or loan), the relief is restricted proportionally.
What Is Incorporation Relief?
Incorporation relief under section 162 TCGA 1992 defers Capital Gains Tax when you transfer a business carried on by an individual (or partnership) to a company, in exchange for shares. It is one of the most commonly used CGT reliefs for business owners moving from self-employment to a limited company structure.[1]
The relief works by reducing the base cost of the shares received in the new company by the amount of the deferred gain. When those shares are eventually sold, the deferred gain will crystallise (although it may then qualify for BADR at 10%).
Conditions for the Relief
All of the following conditions must be met:[2]
- A business must be transferred (not just individual assets) — the business must be transferred “as a going concern”
- All the assets of the business (or all assets other than cash) must be transferred to the company
- The transfer must be in exchange for shares in the company (wholly or partly)
- The business must have been carried on by the individual (sole trader) or partners who are transferring it
“As a going concern” means the business must be a live, operating business at the point of transfer. You cannot incorporate a business that has already ceased trading. The company should continue the same trade immediately after the transfer.
How the Relief Works
When the conditions are met, the gain on all chargeable assets transferred is deferred by reducing the base cost of the shares received. Here is an example:
| Component | Amount |
|---|---|
| Market value of business assets transferred | £500,000 |
| Base cost of assets | £100,000 |
| Total gain on transfer | £400,000 |
| Consideration: shares received | £500,000 |
| Gain deferred (incorporation relief) | £400,000 |
| Base cost of shares for CGT | £500,000 − £400,000 = £100,000 |
If the shares are later sold for £800,000, the chargeable gain would be £700,000 (£800,000 − £100,000), incorporating the deferred £400,000.
Mixed Consideration (Shares and Other)
If the consideration is partly in shares and partly in another form (such as a director’s loan account or cash), the relief is restricted proportionally:[1]
| Component | Amount |
|---|---|
| Market value of assets transferred | £500,000 |
| Consideration: shares | £300,000 (60%) |
| Consideration: director’s loan | £200,000 (40%) |
| Total gain | £400,000 |
| Gain deferred (60% in shares) | £240,000 |
| Gain chargeable immediately | £160,000 |
Tip: To maximise incorporation relief, take 100% of the consideration as shares. You can subsequently extract value through salary, dividends, or pension contributions. Creating a director’s loan account on incorporation reduces the relief available.
Goodwill: Special Considerations
Goodwill is often the most valuable asset in a sole trader business, and it qualifies for incorporation relief. However, there are important restrictions:[4]
- For transfers on or after 3 December 2014, if the individual holds 5% or more of the company’s shares, the company cannot claim a tax deduction for amortisation of the goodwill under the intangible assets regime
- This effectively means there is no Corporation Tax benefit to the company of recognising the goodwill, even though the individual has deferred the CGT
- The goodwill will still appear on the company’s balance sheet as an asset, but provides no ongoing tax relief
Stamp Duty Considerations
Transferring assets to your own company is a transaction between connected persons, so the consideration for stamp duty purposes is the market value of the assets transferred:
- SDLT on land/property: Charged at normal rates on the market value of any land or buildings transferred
- Stamp duty on shares: If transferring shares in other companies, stamp duty of 0.5% applies
- No stamp duty on goodwill: Goodwill is not a “stock or marketable security” so no stamp duty applies
Disapplying the Relief
Since incorporation relief is automatic, you may want to disapply it in certain circumstances. You might choose to crystallise the gain if:[2]
- You have unused capital losses or Annual Exempt Amount that would otherwise be wasted
- You qualify for BADR at 10% on the gain and would prefer to pay now at a low rate rather than defer
- You want to establish a higher base cost for the shares (useful if the company is likely to be sold soon)
To disapply s.162, you can make a joint election for holdover relief under s.165 instead (which gives more control), or simply structure the transaction so that s.162 conditions are not met (e.g. by not transferring all assets).
Incorporation Relief vs Holdover Relief
| Feature | Incorporation Relief (s.162) | Holdover Relief (s.165) |
|---|---|---|
| Application | Automatic | Must be claimed (joint election) |
| Assets transferred | All assets required | Can apply to individual assets |
| Where gain deferred | Into shares | Into each asset in the company |
| Consideration | Must include shares | Can be any form |
| Non-business assets | Relief on all assets | Only business assets |
Frequently Asked Questions
Is incorporation relief automatic?
Yes. Unlike BADR or holdover relief, incorporation relief under s.162 applies automatically when the conditions are met. You do not need to make a claim. However, you can elect to disapply the relief if you prefer to crystallise the gain (for example, to use your Annual Exempt Amount or capital losses).
What happens to the goodwill?
Goodwill is a qualifying asset for incorporation relief. The gain on goodwill is deferred into the base cost of the shares. However, if you transfer goodwill to a company in which you hold 5% or more of the shares, the company cannot claim a tax deduction for amortisation of that goodwill (for transfers after 3 December 2014).
Can I transfer some assets and keep others?
No. Section 162 requires the transfer of the business “as a going concern”, together with the whole assets of the business (or the whole assets other than cash). Cherry-picking individual assets will not qualify.
Does stamp duty apply on the transfer?
Yes. If land or property is transferred, stamp duty land tax (SDLT) will apply at market value because the transfer is to a connected person. Similarly, if shares in other companies are transferred, stamp duty at 0.5% may apply.
Further Reading
- Incorporating a Business: CGT — practical guidance on the incorporation process
- Holdover Relief (Gift Relief) — the alternative deferral relief using s.165
- Goodwill & Intangible Assets — detailed guidance on goodwill CGT
- Business Asset Disposal Relief — claiming BADR at 10% on incorporation
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Sources
- Incorporation relief (HS276) — HMRC
- Capital Gains Manual: incorporation relief — HMRC
- Set up a limited company — GOV.UK
- Capital Gains Manual: goodwill — HMRC