Incorporation relief – Remember to claim it - Landlords Financial | Landlords Bookkeeping Accountants
When a sole trader transfers their business to a limited company, a chargeable gain may arise on the assets transferred. As the connected person rules apply, the gain is calculated by reference to the market value at the date of transfer rather than the sale proceeds, if any. However, where rollover relief on the transfer of a business – generally referred to as ‘incorporation relief’ – is claimed, some or all of the gain can be deferred, reducing or eliminating the immediate capital gains tax bill.
Incorporation relief is a capital gains tax rollover relief that can be claimed where a business is transferred to a limited company wholly or partly in return for shares.
Full relief is available where the consideration is wholly in shares. Here, claiming incorporation relief allows the full gain to be rolled over, reducing the base cost of the shares.
Example 1
Peter incorporates his business, transferring all the assets from his sole trader business to the new limited company, P Ltd, in return for 1,000 ordinary shares in the company.
On incorporation, the business was worth £50,000 (£50 per share).In the absence of incorporation relief, a capital gain of £30,000 will be chargeable immediately.
Peter claims incorporation relief. The gain is rolled over, reducing the base cost of the shares to £20,000 (£20 per share).
If the consideration is received partly in shares in the new company and partly in cash, incorporation relief is only available for so much of the gain as is attributable to the shares. The part of the gain which is attributable to the cash is immediately chargeable.
Example 2
The facts are as in example 1, except that he receives 1,000 ordinary shares in P Ltd and £10,000 in cash. On incorporation, the company was worth £50,000. In the absence of incorporation relief, a capital gain of £30,000 will be chargeable immediately.
Peter claims incorporation relief. In this instance, only the gain attributable to the shares of £24,000 (£30,000 x £40,000/£50,000) can be rolled over, reducing the base cost of the shares to £16,000 (i.e. from £40 per share to £16 per share). The remaining gain of £6,000 attributable to the cash is immediately chargeable.
Claiming the relief
A claim to incorporation relief will not always be beneficial – if the transfer of the business gives rise to a capital loss, which may be the case if the assets have depreciated since they were acquired, or if any gain is sheltered by losses and/or the annual exempt amount, there is no point in claiming the relief. However, where incorporation relief is worthwhile, it must now be claimed; prior to 6 April 2026, it was given automatically. Where the transfer of the business takes place on or after 6 April 2026, the relief must be claimed on or before the first anniversary of the 31 January following the end of the tax year in which the transfer of the business took place. This can be done in the Self-Assessment tax return.
Incorporation relief – Remember to claim it - Landlords Financial | Landlords Bookkeeping Accountants
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