Incorporation Relief When You Turn Your Business into a Company

When you convert your sole trader or partnership business into a limited company, you'll likely make a capital gain on the business assets you transfer. Incorporation Relief allows you to defer paying Capital Gains Tax on that gain until you eventually sell the shares you receive in return. This relief applies automatically when you meet the qualifying conditions.

What is Incorporation Relief?

Incorporation Relief is a Capital Gains Tax (CGT) deferral that applies when you transfer your unincorporated business into a limited company. Instead of paying tax immediately on the gain you've made on your business assets, the tax is postponed until you sell or dispose of the company shares you receive.

A disposal means selling the shares, giving them away, or transferring them to someone else.

Who qualifies for Incorporation Relief?

To qualify for Incorporation Relief, you must meet two conditions:

• You must be operating as a sole trader or in a business partnership
• You must transfer the business and all its assets (except cash) to the company in return for shares

Both conditions must be met. If you keep some assets back or receive only cash rather than shares, you won't qualify for full relief.

How Incorporation Relief works

When you incorporate your business, you're effectively exchanging business assets for company shares. Without relief, you'd pay Capital Gains Tax on any gain made on those assets in the tax year of the transfer.

With Incorporation Relief, the gain is "rolled over" into the shares. The deferred gain reduces the base cost of your shares for CGT purposes.

Here's how the calculation works:

Market value of shares received - Gain deferred = Base cost of shares

For example, you transfer your business to a company and receive shares worth £100,000. Your business assets have increased in value by £60,000 since you started, so you've made a gain of £60,000.

The base cost of your shares becomes £40,000 (£100,000 - £60,000). When you eventually sell the shares, you'll calculate CGT based on this £40,000 base cost rather than the full £100,000 market value.

When you receive both shares and cash

You may receive a mixture of shares and cash when you incorporate. In this situation, Incorporation Relief only applies to the proportion of the business you exchange for shares. You must pay Capital Gains Tax on the portion exchanged for cash in your next tax return.

For example, your business is valued at £100,000 when you transfer it. You receive £80,000 in shares (80%) and £20,000 in cash (20%). Your total gain on the business is £50,000.

You can defer 80% of the gain (£40,000) until you sell the shares. You must pay Capital Gains Tax on 20% of the gain (£10,000) for the tax year in which you incorporated.

In the 2025/26 tax year, you can use your annual CGT allowance (currently £3,000) against the immediate gain, and any remaining gain is taxed at either 10% or 20% depending on your income tax bracket.

Claiming the relief

Incorporation Relief applies automatically if you meet the qualifying conditions. You don't need to make a claim or complete any special forms.

When you complete your Self Assessment tax return for the year you incorporated, you'll need to show the calculation. If you received any cash alongside shares, you'll report and pay tax on the proportion of gain relating to the cash.

Choosing not to use Incorporation Relief

You can opt out of Incorporation Relief if you prefer to pay the Capital Gains Tax when you incorporate rather than defer it.

You might choose to do this if:

• You want to use your annual CGT allowance now rather than save it
• You expect to pay CGT at a higher rate in future
• You want to use other reliefs like Business Asset Disposal Relief (formerly Entrepreneurs' Relief) at the point of incorporation

If you want to opt out of Incorporation Relief, you should contact HMRC or speak to an accountant for advice on how to do this correctly.

What happens when you sell the shares?

When you eventually sell or dispose of the company shares, the deferred gain becomes chargeable to Capital Gains Tax. You'll calculate the gain using the reduced base cost that resulted from applying Incorporation Relief.

At that point, you may be able to claim other reliefs such as Business Asset Disposal Relief, which could reduce your CGT rate to 10% on qualifying gains.

Sources

• Incorporation Relief

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.