When a sole trader or the partners in a partnership transfer a business to a limited company, Capital Gains Tax (CGT) may arise. This is because business assets are normally treated as being transferred at their market value, which may be considerably more than their original cost.
However, Incorporation Relief can allow some or all of the resulting gain to be deferred.
Broadly, the relief may be available where a business is transferred to a company as a going concern, together with all its assets, other than cash if desired, and the consideration received is wholly or partly in shares in the company.
Where the conditions are met, the gain eligible for relief is deducted from the CGT base cost of the shares received. This means that CGT is generally postponed until the shares are eventually sold or otherwise disposed of. If cash or other consideration is received alongside shares, the relief is normally restricted to the proportion of the transfer represented by shares. Part of the gain may therefore become immediately chargeable to CGT.
Incorporation Relief must now be claimed
An important change applies to businesses transferred to companies on or after 6 April 2026. Previously, Incorporation Relief applied automatically where the necessary conditions were satisfied. For transfers from 6 April 2026, the relief must instead be claimed. The claim will normally be made through the Self-Assessment tax return for the tax year in which the transfer takes place.
The claim must be made on or before the first anniversary of 31 January following the tax year in which the business transfer took place. For example, for a transfer during the 2026/27 tax year, the claim deadline will normally be 31 January 2029.
Failing to make a valid claim could therefore result in CGT becoming payable on gains arising when the business is transferred to the company.
Incorporation Relief is not necessarily the best option in every case. Before incorporating a business, it is worth considering the immediate CGT consequences, whether other reliefs may be available and the potential tax position when the company shares are eventually sold.
Professional advice should therefore be obtained before completing a business incorporation, particularly where the business has significant goodwill, property or other assets that have increased substantially in value.
