Glossary · UK
What is Incorporation Relief?
A capital gains tax relief that defers the gain when an unincorporated business is transferred to a company in exchange for shares.
Full Definition
Incorporation Relief defers the capital gains tax that would otherwise arise when a sole trader or partnership transfers their business to a limited company. When you incorporate, you are treated as disposing of the business assets, including goodwill, at market value, which can produce a large chargeable gain. Provided you transfer the whole business as a going concern, with all its assets except cash, in exchange wholly or partly for shares in the new company, the gain is automatically rolled into the base cost of those shares. The relief applies without a claim, although you can elect to disapply it, which may be useful where you want to use your annual exempt amount of 3,000 or claim Business Asset Disposal Relief at 18% instead. If you take some consideration as cash or a loan rather than shares, relief is restricted proportionately and part of the gain becomes chargeable. The deferred gain is brought back into charge when you later sell the shares. Incorporation also has income tax, National Insurance, stamp duty and VAT consequences, so the CGT position is only one factor in deciding whether to incorporate a business.