You may be able to delay paying Capital Gains Tax if you transfer your business to a company in return for shares.
Incorporation Relief means you will not pay any tax until you sell (or ‘dispose of’) the shares.
To qualify for Incorporation Relief, you must:
- be a sole trader or in a business partnership
- transfer the business and all its assets (except cash) in return for shares in the company
How to claim
You do not have to claim Incorporation Relief - you’ll get it automatically if you’re eligible.
To work out the amount you need to pay Capital Gains Tax on, deduct the gain you made when selling your business from the market value of the shares you received.
Example You transfer your business in return for shares worth £100,000. You make a profit of £60,000. You later sell the shares and need to work out the gain - their cost for your Capital Gains Tax calculations is £40,000 (£100,000 - £60,000).
If you get cash as well as shares
You might receive cash and shares when you transfer your business.
You only get Incorporation Relief on the proportion of the business you exchange for shares - you’ll have to pay Capital Gains Tax on the cash.
Example Your business is valued at £100,000 when you transfer it, and you receive 80% in shares (£80,000) and 20% in cash (£20,000). You made a gain of £50,000. You can postpone 80% of the gain (£40,000) until you sell the shares. You need to pay Capital Gains Tax on 20% of the gain (£10,000) in your next tax return.
If you do not want to claim Incorporation Relief
You can choose not to have Incorporation Relief. Contact HM Revenue and Customs (HMRC) if you need advice, or get help from an accountant or tax adviser.