Key takeaways
- Incorporation relief defers Capital Gains Tax when a sole trader or partnership transfers a whole business to a company in exchange for shares.
- All the business assets, except cash, must be transferred and the business must go across as a going concern.
- From 6 April 2026, the relief must be claimed; it no longer applies automatically.
- The deferred gain reduces the base cost of the shares, so it is taxed when the shares are eventually sold.
- Goodwill, property, VAT, stamp duty and capital allowances all need planning when a business incorporates.
When a sole trader or partnership moves its business into a new limited company, the business assets are treated as sold to the company at market value. Without relief, that could create a Capital Gains Tax (CGT) bill on goodwill and property before the company has earned anything. Incorporation relief, under section 162 of the Taxation of Chargeable Gains Act 1992, lets the gain be deferred.
The conditions
Incorporation relief applies when:
- a person who is not a company (a sole trader, or the individual partners in a partnership) transfers a business to a company
- the business is transferred as a going concern
- all the assets of the business are transferred, or all except cash
- the consideration is wholly or partly in shares issued by the company
If part of the consideration is not shares, such as a credit to a director’s loan account, relief is only given on the proportion paid in shares.
How the relief works
The gain on the assets transferred is deducted from the base cost of the new shares, so no CGT is paid on incorporation.
Example
Sian’s catering business has goodwill worth £200,000 (base cost nil) and equipment worth £20,000 that cost more than that. She incorporates in 2026/27, transferring the whole business for 220,000 £1 shares.
| Amount | |
|---|---|
| Gain on goodwill | £200,000 |
| Gain deferred by incorporation relief | (£200,000) |
| CGT payable on incorporation | £0 |
| Market value of shares received | £220,000 |
| Base cost of shares (£220,000 − £200,000) | £20,000 |
If Sian sells the company later for £500,000, her gain will be £480,000, and Business Asset Disposal Relief may be available at that time if she qualifies.
The claim requirement from April 2026
For transfers made on or after 6 April 2026, incorporation relief must be claimed on the tax return, rather than applying automatically. Make sure the claim is included, with the details of the assets transferred and the shares issued.
Choosing not to defer
Sometimes paying tax now is better, for example to use the £3,000 annual exempt amount or Business Asset Disposal Relief at 18% while available. Before April 2026 this was done by electing to disapply the relief; under the new rules, it is a question of whether to claim. Alternatively, structuring the transfer partly for a loan account credit gives a taxable gain on that part, which can then be drawn out tax-free over time; get advice, because goodwill sold to a related company does not qualify for a Corporation Tax deduction and Business Asset Disposal Relief on goodwill to a close company can be restricted.
The other taxes on incorporation
| Tax | Issue | Common solution |
|---|---|---|
| Income Tax | The sole trade ceases; final basis period and any overlap or transitional profits | Plan the incorporation date and final accounts |
| Capital allowances | Assets transferred at market value could create balancing charges | Connected parties can elect to transfer at tax written-down value |
| VAT | Transfer of assets could attract VAT | Transfer of a going concern: no VAT charged, and the VAT number can be transferred |
| Stamp Duty Land Tax | Transferring property to a company is a purchase at market value | Partnerships may get relief in some cases; otherwise often better to keep property personally and let it to the company |
| Stock | Trading stock transferred at market value can create profit | Connected parties can elect to use a different value in some cases |
Is incorporating right for you?
Incorporation can reduce tax on higher profits and gives limited liability, but brings more administration and costs. See sole trader vs limited company and our step-by-step guide to switching from sole trader to limited company.
Frequently asked questions
What is incorporation relief?
A relief that defers Capital Gains Tax when a business is transferred to a company in exchange for shares, by reducing the base cost of the shares.
Do I have to claim incorporation relief?
Yes, for transfers on or after 6 April 2026. It previously applied automatically.
Does incorporation relief apply if I keep some assets?
Not if you keep business assets other than cash. All the assets of the business, except cash, must be transferred.
Can I claim a tax deduction for goodwill I sell to my own company?
Generally no. Goodwill acquired by a company from a related individual does not usually qualify for Corporation Tax relief.
Sources
Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance in October 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.