Introduction to Incorporation Relief for Tax Purposes in the UK

In the UK, incorporation relief is a valuable tax relief that allows business owners to transfer their existing business assets into a newly formed company without incurring immediate capital gains tax (CGT) liabilities. This process is designed to encourage entrepreneurs to incorporate their businesses and benefit from the advantages that come with operating as a limited company, such as limited liability and potential tax savings.

When a sole trader or partnership decides to incorporate their business, they may transfer assets such as property, equipment, and goodwill to the new company. Under normal circumstances, selling these assets could trigger capital gains tax on the profit made from the sale. However, incorporation relief allows for these gains to be deferred, meaning you won’t have to pay tax on the transfer of these assets at the time of incorporation.

Key Features of Incorporation Relief

1. Eligibility: To qualify for incorporation relief, the business must be an unincorporated entity, such as a sole trader or partnership. The assets being transferred must also be used in the business.
   
   
2. Assets Covered: Incorporation relief can apply to a wide range of assets, including tangible assets (like machinery and stock) and intangible assets (like goodwill).
   
   
3. Deferral of Tax Charge: Instead of paying CGT upon transferring assets to the corporation, the relief allows the gain to be rolled over. This means that the taxable gain arising on the disposal of the business by the sole trader / partner is postponed until the person transferring the business disposes of the shares.
   
   
4. Claiming Relief: The relief is automatic where the qualifying conditions are met, but we would generally also suggest appropriate disclosure of the annual self-assessment tax return. Sometimes it is preferable not to have the relief applied, where this is the case an election must be made. It’s essential to maintain accurate records to substantiate the value of the transferred assets.
   
   
5. Restrictions: It’s important to note that if any cash or other non-qualifying assets are received during the incorporation process, CGT may apply to those amounts, as incorporation relief only applies to the transfer of business assets.

Incorporation relief can be an attractive tool for business owners in the UK looking to transition their operations into a limited company structure without the immediate financial burden of capital gains tax. By allowing entrepreneurs to defer tax liabilities, incorporation relief promotes business growth and encourages the advantages of conducting business through a corporate entity. For those considering this route, please get in touch to understand the implications and ensure compliance with tax regulations.

About Arnold Hill & Co LLP 

Arnold Hill & Co LLP is an accountancy and tax firm who have been delivering tailored accountancy services for over a century. Based in the heart of London, the firm is built on strong, lasting relationships and combine tradition with a forward thinking approach to meet the evolving needs of clients, both across the UK and internationally. The firm advise a range of clients ranging from UHNWI’s, family offices and entrepreneurs to growing businesses and multinational groups.