B9.113 Computation of incorporation relief
To compute the relief available on the transfer of a business to a company, the gain on the old assets needs to be calculated first1. This is the aggregate of the transferor's net chargeable gains on the disposal of the assets included in the business2. Any allowable losses arising on assets comprised within the disposal must be set off against chargeable gains.
The total amount of the gain on the old assets is then multiplied by the fraction A/B, where:
(A) is the cost of the new assets (ie shares); and
(B) is the value of the whole of the consideration received by the transferor in exchange for the business3
This gives the amount of the net chargeable gain which can be rolled over. However, the gain which can be rolled over cannot exceed the cost of the shares (ie any sums which would be allowable under TCGA 1992, s 38 as a deduction if the shares were disposed of as a whole in circumstances giving rise to a capital gain, see C2.201–C2.207)4 which means that the base cost of the shares cannot be reduced to a negative amount. The effect is that a capital gains tax charge can arise relatively easily where major liabilities are taken over by the company. See the Example in B9.114.
The amount of the net chargeable gain which can be rolled over is then deducted from the amount of the gain on the old assets5.
XY has carried on business as a