Self-Employment Guide -- Updated July 2026
Incorporation Relief Guide 2026/27
Converting a sole trader business or partnership into a limited company can trigger a Capital Gains Tax bill on goodwill and other business assets -- unless Incorporation Relief applies. This guide explains the qualifying conditions, how the deferral works, and when the gain eventually crystallises.
What Incorporation Relief Is
When a sole trader or partnership transfers their business into a limited company -- a step often called "incorporating" -- the business's chargeable assets, including goodwill built up over time, are treated as being disposed of at market value for Capital Gains Tax purposes, which can create a significant gain even though no cash has actually been received. Incorporation Relief exists to prevent this from creating an immediate tax bill: instead of taxing the gain straight away, the gain is rolled into the base cost of the new shares received in exchange for the business, deferring the tax until those shares are eventually sold.
Qualifying Conditions
Incorporation Relief applies automatically, without a separate claim, provided the qualifying conditions are met: the transferor must be operating as a sole trader or a partner transferring their share of the partnership business, the entire business must be transferred as a going concern rather than just selected assets being sold off, all the business assets (with cash sometimes an exception) must be transferred to the company, and the consideration received for the transfer must be wholly or mainly in the form of shares in the new company. Failing any one of these conditions can mean the relief does not apply at all, so the transfer needs to be structured carefully.
Taking Cash as Well as Shares
It's common for a business owner to want to extract some value as cash (or a director's loan account credit) rather than taking the entire consideration in shares. Partial Incorporation Relief can still apply if the consideration is mainly shares with some cash or other non-share consideration mixed in, but the relief is proportionately restricted -- the cash or non-share element is treated as ordinary disposal proceeds and can create an immediate CGT charge on that portion, even while the share portion of the gain remains deferred.
Goodwill and Incorporation
Goodwill built up in a sole trader or partnership business is itself a chargeable asset for CGT purposes, and it is often one of the largest components of the gain arising on incorporation. Incorporation Relief can defer the CGT on goodwill in the same way as on other business assets, provided the qualifying conditions are met, but separate Corporation Tax anti-avoidance rules restrict the company's ability to claim amortisation relief on goodwill acquired from a related party (such as the incorporating owner) in many cases, so the CGT and Corporation Tax treatment need to be considered together rather than in isolation.
Incorporation Relief vs Business Asset Disposal Relief
These two reliefs work in fundamentally different ways and are sometimes weighed against each other. Incorporation Relief defers the gain entirely into the future by reducing the base cost of the new shares, meaning no CGT is paid at the point of incorporation. Business Asset Disposal Relief (the renamed Entrepreneurs' Relief) instead reduces the rate of CGT paid on a qualifying disposal, subject to a lifetime limit, but the tax is still paid now rather than deferred. Some business owners deliberately elect to disapply Incorporation Relief specifically so they can pay CGT now at the lower Business Asset Disposal Relief rate on the incorporation gain, rather than deferring a potentially larger gain (taxed at whatever rates apply in future) into their new shares -- which option suits you depends heavily on individual circumstances and is worth discussing with a tax adviser.