Guidance

HS276 Incorporation Relief (2024) Roll-over relief on transfer of a business

Updated 6 April 2024

This helpsheet provides information about the relief available if you incorporate your business. It also tells you what to do if you do not want the relief to apply.

It will help you to fill in the Capital Gains Tax summary pages of your tax return.

This helpsheet is only an introduction. For further support, you can:

• speak to your tax advisor
• contact HM Revenue and Customs (HMRC)
• read the Capital Gains Tax Manual

1. Introduction

You should use this helpsheet if you are an individual or partnership who wants to incorporate a business by transferring the business, and all of its assets, 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 its assets) until you dispose of the ‘new assets’ (the shares).

If the requirements are met, this relief is given automatically by section 162 Taxation of Chargeable Gains Act 1992. This may not always be to your advantage.

If you do not want Incorporation Relief, you can elect for section 162 to not apply on the transfer of your business. You can make this election to HMRC in writing.

2. Incorporation Relief

If you incorporate your business by transferring it, and all of its assets, 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 of the difference between the market value of the assets and their original cost to you.

You will get Incorporation Relief if you transfer your business:

• to a company as a going concern with all of its assets (which may exclude cash)
• in exchange, wholly or partly, for shares in the transferee company

The relief is given automatically so you do not need to make a claim. It works by reducing the base cost of the new assets by a proportion of the gain from the disposal of the old assets.

2.1 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. The agreed chargeable gain that would have arisen without Incorporation Relief on the assets transferred was £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. However, this is reduced by the amount of the deferred gain (£60,000), leaving a base cost of £40,000, or £40 per share.

2.2 Example 2

Bill Brown incorporated his business in May 2023 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. The agreed chargeable gain on the assets transferred that would have arisen without Incorporation Relief was £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. However, 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 CGT on the balance of the chargeable gain, £12,000 (£60,000 - £48,000), for the tax year 2023 to 2024.

2.3 Example 3

Elizabeth Nicholls incorporated her business in July 2023. She received 1,000 £1 ordinary shares in ESN Ltd. 

The capital account in her business was £23,000. On incorporation, this was converted into a director’s loan account, on which she could draw. 

The business was worth £100,000 on incorporation. The agreed chargeable gain on the assets transferred that would have arisen without Incorporation Relief was £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.

Elizabeth does not pay all of the CGT immediately. The part of the gain attributable to the consideration in shares 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. However, 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 CGT on the balance of the chargeable gain, £13,800 (£60,000 - £46,200), for the tax year 2023 to 2024.

3. How you can elect not to have Incorporation Relief

You can elect for section 162 Taxation of Chargeable Gains Act 1992 not to apply. You will need to give notice in writing to HMRC before the relevant date.

The relevant date depends on whether 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 31 January following the tax year in which you sold the shares (the filing date for that year’s tax return).

3.1 Example 4

Mr Green transfers his business to XYZ Ltd in exchange for shares in October 2022 (2022 to 2023). 

He sells his shares in XYZ Ltd in March 2024 (2023 to 2024). 

Mr Green must make an election before 31 January 2025 if he does not want Incorporation Relief.

You must tell HMRC before 31 January 3 years after the tax year in which the transfer took place if:

• you keep all of the shares received in exchange
• you sell some or all of the shares after the end of the tax year following the one in which the transfer took place

3.2 Example 5

Mr Black transfers his business to PQR Ltd in exchange for shares in October 2023 (2023 to 2024). 

He retains his shares but does not want Incorporation Relief.

Mr Black must make an election before 31 January 2027.

4. Transferring shares to your spouse or civil partner

The transfer is not treated as a disposal for the purposes of election if:

• you transfer the shares to your spouse or civil partner, whether as a gift or a sale
• you live with your spouse or civil partner
• section 58(1) Taxation of Chargeable Gains 1992 applies to the transfer

To find out more, read Helpsheet 281 Capital Gains Tax, civil partners and spouses.

Your relevant date for making an election is the second anniversary of 31 January following the tax year in which the transfer took place.

If your spouse or civil partner disposes of the shares to anyone other than you, this is a disposal for the purposes of deciding the relevant date for making an election.

5. Owning part of the business and the other owners do not want to elect out of Incorporation Relief

Each person who owns a business can make their own election. This means you can make your own election, independent of the other shareholders or owners.

This right also applies to partners in a business partnership.

6. Applying Incorporation Relief

If the transfer of your business meets the requirements of section 162 Taxation of Chargeable Gains Act 1992, you do not need to do anything. You will get the relief automatically, without making a claim.

7. Contact

For more information about online forms, phone numbers and addresses, contact Self Assessment: general enquiries.