Capital gains tax implications of incorporation

Produced by Tolley in association with Julie Butler

The following Owner-Managed Businesses guidance note Produced by Tolley in association with Julie Butler provides comprehensive and up to date tax information covering:

  • Capital gains tax implications of incorporation
  • Incorporation relief
  • Disapplying incorporation relief
  • Gift relief alternative
  • Alternative ― pay CGT on goodwill transfer
  • Business asset disposal relief

Capital gains tax implications of incorporation

The Incorporation ― introduction and procedure guidance note summarises various tax implications of incorporating a business. This note provides further details of the capital gains tax aspects.

The transfer of business assets by an individual to a company controlled by them is a disposal for capital gains tax purposes. The disposal is deemed to take place at market value because the sole trader and the company are ‘connected persons’. The sole trader will therefore have a capital gain on the chargeable assets at the point of incorporation. The chargeable assets will usually be land and buildings, and possibly goodwill. It is unlikely that gains will arise on other assets such as plant and machinery as these will either be standing at a loss (for which relief is given via the capital allowances computation) or at a gain, which will be exempt under the chattels rules.

The CGT liability arising on the disposals can be deferred by claiming one of two possible CGT reliefs:

  1. incorporation relief (otherwise known as roll-over relief on the transfer of a business to a company), or

  2. gift relief (otherwise known as hold-over relief)

TCGA 1992, ss 162, 165

Alternatively, a capital gain could be realised by an outright sale and a claim made for business asset disposal relief (previously known as entrepreneurs’ relief), if available, to obtain a 10% tax rate.

For further reading on capital gains aspects of incorporation, see Simon’s Taxes Division B9.1 and HMRC’s guidance at CG68050.

Incorporation relief

There are three conditions to be satisfied before incorporation relief is given:

  1. the business transferred must be a ‘going concern’

  2. all assets of the sole trader (except cash) must be transferred to the company. This means that if the sole trader wishes to retain any assets outside the company, such as land or buildings, incorporation relief will not be available

  3. the consideration paid to the individual by the company must be wholly or partly in shares

The relief is calculated by

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