Incorporation Relief lets a sole trader or business partner defer Capital Gains Tax when they transfer their business to a limited company in exchange for shares. Under section 162 TCGA 1992, the gain on your business assets is deducted from the base cost of your new shares, so the tax is postponed until you sell those shares. The relief applies automatically when the conditions are met, though you can choose to opt out.

Turning your business into a limited company can trigger a Capital Gains Tax charge, because for tax purposes you are disposing of your business assets. Incorporation Relief exists so that this move does not create an immediate tax bill you may struggle to pay. It defers the gain rather than wiping it out, which is why understanding how it works matters before you incorporate.

What is Incorporation Relief?

Incorporation Relief is set out in section 162 of the Taxation of Chargeable Gains Act 1992. It applies when a person who is not a company transfers a business to a company and receives shares in return. Instead of paying Capital Gains Tax on the gain arising from your business assets, the gain is rolled into the value of your new shares. HMRC calculates the gain, then deducts it from the base cost of the shares you receive. The tax becomes payable later, when you eventually sell those shares.

For many people leaving self employment behind, this is one of the reasons incorporating feels affordable. If you are still weighing the wider decision, our guide to sole trader vs limited company compares the two structures in detail.

What are the conditions?

Three conditions must be met for the relief to apply:

  • The business must be transferred as a going concern, meaning it continues to operate rather than being wound down.
  • You must transfer all of the assets of the business, or all of the assets except cash. You cannot pick and choose which assets to move across.
  • The business must be transferred wholly or partly in exchange for shares in the company.

The requirement to transfer everything except cash catches out a lot of people. If you want to keep a particular property outside the company, for example, Incorporation Relief will not apply, because you would not be transferring the whole business.

How is the deferred gain calculated?

The gain on your business assets is worked out in the normal way, then held over against the value of the shares. Suppose your business is worth £400,000 and includes goodwill and equipment that produce a chargeable gain of £150,000. If you take the full £400,000 as shares, the whole £150,000 gain is deferred and the base cost of your shares is reduced by that amount. When you later sell the shares, the gain resurfaces and Capital Gains Tax is calculated using the reduced base cost, at the rates that apply at that time. Our page on Capital Gains Tax rates sets out the current bands.

What if you take some cash as well as shares?

You do not have to take the whole value in shares. Where only part of the consideration is shares and the rest is cash or a loan account, the relief is proportionate. The deferred gain is limited to the fraction represented by the shares, and you pay Capital Gains Tax now on the part matched by the other consideration. So if half your consideration is shares and half is cash, roughly half the gain is deferred and half is taxable straight away.

Is Incorporation Relief automatic?

Yes. If the conditions are met, the relief is given automatically and you do not need to make a claim. That sounds convenient, but it can work against you. In some situations you may prefer to trigger the gain now, for instance to use Business Asset Disposal Relief and pay tax at a reduced rate while it is available, rather than deferring a larger gain to an uncertain future rate.

You can elect for Incorporation Relief not to apply. You do this by writing to HMRC. If you dispose of the shares before the end of the tax year after the one in which you transferred the business, the election must be made by 31 January following the tax year of the disposal. Otherwise the deadline is 31 January, roughly two years after the end of the tax year in which the transfer took place. Each business owner can decide independently, so one partner can opt out while another keeps the relief.

What else should you watch out for?

Incorporation Relief is not automatically the best route just because it defers tax. Transferring land or property into the company can create a Stamp Duty Land Tax charge for the company, and moving goodwill has its own consequences for both Capital Gains Tax and Corporation Tax going forward. Our overview of Corporation Tax explained covers what the company itself will face. An alternative such as Gift Holdover Relief may suit some transfers better, so the right answer depends on your assets and your plans.

Incorporating is a point where HMRC often takes a closer look at valuations, particularly of goodwill. Solar Protect tax investigation insurance covers up to £100,000 of your accountant’s fees with no excess if your return is queried. Get a quote.

Reviewed by Matthew Bartlett, Director, Solar Protect. This guide is general information, not personalised tax or financial advice. Figures are correct for the 2025/26 and 2026/27 UK tax years at the time of writing.