Incorporation relief

Definition

Incorporation relief is a tax relief available in the UK that facilitates the transition of a business from a sole trader or partnership structure to a limited company by deferring the payment of capital gains tax (CGT) on the transfer of assets. 

What is the incorporation relief?

The incorporation relief is designed to make it easier for business owners to incorporate their business by removing the immediate tax burden associated with transferring assets into a new corporate entity. It supports business owners by deferring the tax liability, enabling them to focus on the operational benefits of incorporating their business.

When a sole trader or partnership incorporates and transfers their business assets, such as property, equipment, or stock, into a newly formed limited company, Incorporation relief allows the deferred payment of CGT on any gains that arise from the transfer. Instead of paying CGT at the time of incorporation, the relief allows the gains to be rolled over and deferred until the assets are eventually sold by the company.

To qualify for incorporation relief, several conditions must be met. The assets transferred must be used in the company’s trade, and the business owner must hold shares in the new company. Additionally, the transfer of assets must be made in exchange for shares in the company, and the new company must continue to use the assets in its business.

Example of incorporation relief

A sole trader running a small retail business decides to incorporate the business into a limited company. The sole trader transfers the shop premises and inventory, valued at £200,000, into the new company in exchange for shares. 

Thanks to incorporation relief, the sole trader does not have to pay capital gains tax on the £200,000 gain at the time of incorporation. Instead, the relief defers the tax liability until the company eventually sells the assets. This allows the business owner to incorporate without facing an immediate tax burden, facilitating a smoother transition to the new business structure.