Deferring gains using Incorporation Relief

Thinking of transferring your sole trader or partnership business into a limited company? Incorporation Relief can help defer any capital gains tax on assets like goodwill. If the entire business is transferred in exchange for shares, the relief applies automatically, no claim needed. Make sure you understand the rules and deadlines, especially if you plan to opt out.

When a sole trader or partnership transfers their business into a company, a capital gain may arise. The gain is based on the market value of the business assets (including goodwill) at the time of incorporation, compared to their original cost.

However, businesses incorporated in this way may qualify for Incorporation Relief. To benefit from this relief, the entire business, along with all its assets (excluding cash, if applicable), must be transferred as a going concern in exchange, wholly or partly, for shares in the new company.

Incorporation Relief is automatic if the conditions are met. There is no need to submit a claim. The relief defers the capital gain by reducing the base cost of the new shares by the amount of the deferred gain, effectively postponing any tax until the shares are sold.

Although the relief applies automatically, a taxpayer can elect for it not to apply. This must be done in writing, and the election must be submitted by 31 January, two years after the end of the tax year in which the incorporation occurred. For example, for a transfer in the current 2025–26 tax year, the election deadline is 31 January 2029. The election deadline is reduced by one year if the shares are disposed of in the year following that in which the business was incorporated.