When a sole trader or partnership transfers a business to a limited company, a chargeable gain may arise. This is usually calculated by comparing the market value of the business assets at the date of incorporation with their original cost. Without any relief, this gain would normally be subject to Capital Gains Tax (CGT).
However, Incorporation Relief can allow the tax charge to be deferred. Broadly, the relief applies where the whole business is transferred as a going concern, together with all of its assets (apart from cash where applicable), to a company in exchange wholly or partly for shares.
Where the conditions are met, Incorporation Relief applies automatically and no claim is required. The gain is deferred by reducing the base cost of the shares received. This means the CGT charge is postponed until the shares are later disposed.
If cash or other consideration is received alongside shares, only the proportion of the gain relating to the shares can usually be deferred, with the remaining amount potentially becoming immediately taxable.
Incorporation Relief may not always be beneficial, and taxpayers can elect for it not to apply by notifying HMRC in writing within the required deadline. The deadline depends on when the shares are disposed of and whether they are retained. For a transfer in the current 2026–27 tax year, the election deadline is 31 January 2030. This deadline is reduced by one year if the shares are disposed of in the tax year following that of incorporation.
