HS276 Incorporation Relief (2020) Roll-over relief on transfer of a business
Updated 6 April 2024
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This helpsheet gives you information about the relief which is available if you incorporate your business. It also gives you information about what to do if you do not want the relief to apply. It’s only an introduction and if you’re in any doubt about your circumstances you should ask your tax adviser. You can also consult the Capital Gains Tax Manual, which explains the rules in more detail. This helpsheet will help you fill in the Capital Gains Tax summary pages of your tax return.
Introduction
If you, either as an individual or in partnership, incorporate a business by transferring the business, together with all the assets of the business, in exchange wholly or partly for shares, you can defer some or all of the gain arising from the disposal of the ‘old assets’ (the business and the assets of the business) until such time as you dispose of the ‘new assets’ (the shares).
This relief is given automatically by section 162 Taxation of Chargeable Gains Act 1992, provided the various requirements are met. This may not always be to your advantage.
If you do not want Incorporation Relief section 162A allows you to elect for section 162 to not apply on the transfer of your business, you can make this election by writing to HMRC.
Incorporation Relief
If you incorporate your business by transferring the business and all the assets of the business to a new or existing company, you are treated as if you had disposed of the assets for their market value. This may give rise to a chargeable gain based broadly on the difference between the market value of the assets and their original cost to you.
Incorporation Relief is given if the business, together with the whole of its assets (or all its assets other than cash) is transferred, the business is transferred as a going concern, and the business is transferred in exchange wholly or partly for shares in the transferee company.
The relief is given automatically and there is no need to make a claim. The relief works by reducing the base cost of the new assets by a proportion of the gain arising from the disposal of the old assets.
Example 1
John Smith incorporated his business and received 1,000 £1 ordinary shares in ABC Ltd. The business was worth £100,000 on incorporation, so that the shares had a market value of £100 each, and the agreed chargeable gain on the assets transferred amounted to £60,000.
Mr Smith does not pay Capital Gains Tax (CGT) immediately.
His cost of the shares for the purposes of any future disposal would normally be £100,000 but this is reduced by the amount of the deferred gain, £60,000, leaving a base cost of £40,000.
Example 2
Bill Brown incorporated his business in May 2019 and received 1,000 £1 ordinary shares in CDE Ltd and £20,000 in cash.
The business was worth £100,000 on incorporation, so that the shares had a market value of £80 each, and the agreed chargeable gain on the assets transferred amounted to £60,000.
Mr Brown does not pay all of the CGT immediately. The part of the gain attributable to the consideration in shares is £60,000 × £80,000 ÷ £100,000 = £48,000. This part of the gain is deferred.
His cost of the shares for the purposes of any future disposal would normally be £80,000 but this is reduced by the amount of the deferred gain £48,000, leaving a base cost of £32,000, or £32 per share.
Mr Brown is liable to tax on the balance of the chargeable gain, £12,000, for the tax year 2019 to 2020.
Example 3
Elizabeth Nicholls incorporated her business in July 2019 and received 1,000 £1 ordinary shares in ESN Ltd.
The capital account in her business was £23,000 and this was converted into a director’s loan account on incorporation on which she could draw.
The business was worth £100,000 on incorporation and the agreed chargeable gain on the assets transferred amounted to £60,000.
The director’s loan account forms part of the consideration that Elizabeth received and is treated as cash consideration. The shares will therefore have a market value of £77 each.
As above, Elizabeth will not pay CGT on the part of the gain attributable to the consideration paid in shares, the gain thus attributable is £60,000 × £77,000 ÷ £100,000 = £46,200. This part of the gain is deferred.
Her cost of the shares for the purposes of any future disposal would normally be £77,000 but this is reduced by the amount of the deferred gain, £46,200, leaving a base cost of £30,800 or £30.80 per share.
Miss Nicholls is liable to tax on the balance of the chargeable gain, £13,800 (£60,000 - £46,200), for the tax year 2019 to 2020.
How you can elect not to have Incorporation Relief
You can elect for section 162 Taxation of Chargeable Gains Act 1992 not to apply. This may be done by giving notice in writing to HMRC before the relevant date.
The relevant date depends on whether or not you dispose of the shares you received in exchange for the business and, if so, when that disposal takes place.
If you sell all the shares before the end of the tax year following the one in which the transfer of the business took place, you must tell HMRC before the first anniversary of 31 January next following the tax year in which the transfer took place.
Example 4
Mr Green transfers his business to XYZ Ltd in exchange for shares in October 2018 (2018 to 2019).
Mr Green sells his shares in XYZ Ltd in March 2020 (2019 to 2020).
Mr Green must make an election before 31 January 2021 if he does not want Incorporation Relief.
In all other cases, an election may be made before the second anniversary of 31 January next following the tax year in which the transfer took place.
Example 5
Mr Black transfers his business to PQR Ltd in exchange for shares in October 2019 (2019 to 2020).
Mr Black retains his shares but nevertheless does not want Incorporation Relief.
Mr Black must make an election before 31 January 2023.
Transferring shares to your spouse or civil partner
If you transfer the shares you received in exchange for the business to your spouse or civil partner with whom you’re living, by way of gift or sale, this is not treated as a disposal for the purposes of election, provided that the transfer is under circumstances where section 58(1) Taxation of Chargeable Gains 1992 applies. Helpsheet 281 Capital Gains Tax, civil partners and spouses will give you further details.
This means that your relevant date for making an election continues to be the second anniversary of 31 January next following the tax year in which the transfer took place.
If your spouse or civil partner disposes of the shares to anyone other than back to you, that disposal is regarded as a disposal by you for the purposes of deciding which is the relevant date for making an election.
Owning part of the business and the other owners do not want to elect out of Incorporation Relief
If the business was owned by more than one person, whether or not in partnership, each person has a separate entitlement to make an election. You can make your own election independently of the other shareholders or owners.
Applying Incorporation Relief
Provided the transfer of the business fulfils the requirements of section 162 Taxation of Chargeable Gains Act 1992, you do not need to do anything as the relief is given without a claim.
Contact
For more information about online forms, phone numbers and addresses contact Self Assessment: general enquiries.