Incorporation of a business

By Tolley

The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Incorporation of a business
  • Advantages of incorporating a business
  • Incorporation relief
  • Business asset gift relief as an alternative to incorporation relief
  • Entrepreneurs’ relief
  • Other considerations
  • Disincorporation relief

The transfer of business assets by an individual to a company is a disposal for capital gains tax purposes. The disposal proceeds are deemed to be market value because the sole trader and the company are ‘connected persons’. See the Basic calculation principles of capital gains tax guidance note.

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 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 any gains will be exempt under the rules for wasting chattels. See the Chattels guidance note.

The trader can defer the capital gains on chargeable assets by claiming either incorporation relief or business asset gift relief. Any gain that is not deferred under these provisions may be reduced by claiming entrepreneurs’ relief.

When calculating the capital gain or loss on business land and buildings, you should consider the HMRC 'Capital gains tax for land and buildings'  toolkit. The aim of the toolkit is to prevent common errors made by practitioners in the CGT reporting of disposals of land and buildings.

Advantages of incorporating a business

Sole traders or partners in partnership may decide to incorporate their businesses for the following reasons:

  • the limitation of liability for directors and shareholders versus unlimited liability of sole traders or partners in a general partnership (although some banks may request a personal guarantee from the directors)
  • to crystallise overlap relief, as the unincorporated business is treated as ceasing on incorporation (see the Basis periods guidance note for more on overlap relief)

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