Incorporation Relief: Navigating the Complexities of Tax Planning 

Incorporating a business has become a common strategy for entrepreneurs, but the motivations behind this decision have evolved. While tax planning was once the primary driver, the changing tax landscape has made it crucial to assess the viability of incorporation solely for tax savings, particularly for businesses with profits below approximately £50,000. The administrative burdens associated with running a company can often outweigh the tax advantages in such cases. Additionally, recent shifts towards environmental, social, and governance (ESG) considerations are influencing businesses to align their incorporation strategies with sustainable practices, thereby affecting tax planning and public perception. 

The transfer of a business to a limited company structure involves Capital Gains Tax (CGT) implications, as chargeable business assets, including goodwill and land/buildings, are disposed of to the company. Incorporation Relief (IR) offers a means to defer the CGT liability. However, the conditions for claiming IR must be met: the business must be transferred as a going concern, with all assets (excluding cash) being transferred, and consideration for the transfer comprising shares in the company issued to the sole trader. Additionally, transferring ownership of land or buildings to the company may necessitate remortgaging. 

Determining the value of the transferred assets can be complex. Parties involved in the transfer are considered “connected persons,” meaning that the transaction is treated as occurring at ‘market value.’ This refers to the amount the property could fetch on the open market. Even non-monetary consideration is subject to this valuation rule, emphasising the importance of establishing fair market value. 

Under IR, the CGT charge is deferred or ‘rolled over’ until the business owner disposes of their company shares. The ‘rolled over’ gain is deducted from the cost of the shares, resulting in a gain on sale determined by the final sale price. If cash is part of the consideration, the ‘rolled over’ gain is proportionately reduced. In light of recent considerations, legislative proposals are being reviewed to potentially cap the amount of gain that can be deferred, especially significant in the wake of economic challenges posed by global events. 

Although incorporation relief applies automatically if the conditions are met, there is the option to disapply it through an election. Certain circumstances may prevent a claim for IR, such as the transfer of only a portion of business assets or if the consideration involves shares with limited marketability. Disapplication may be preferable if the gain is covered by the annual exemption or if available losses can offset it. 

Another aspect to consider is when the business owner intends to transfer a loan to the company. While HMRC (HM Revenue & Customs) provides a concession (ESC D32) to address this situation, challenges may arise with the lender due to differing borrowing criteria between personal and corporate loans. Cooperation between the lender and borrower, accompanied by refinancing terms, can resolve these challenges, and ensure IR availability. 

In some instances, it may be more appropriate to explore alternative CGT reliefs, such as Business Asset Disposal Relief or Gift Relief, particularly when there are assets that will not be transferred. Disapplying incorporation relief or retaining non-cash assets outside the company can also be strategic options to consider. 

Navigating the complexities of property taxes necessitates the guidance of qualified professionals. At Deeks VAT Limited, we specialise in helping property clients manage their tax, legal, and accountancy affairs holistically. Our expertise ensures that portfolio landlords, developers, and business owners can optimise their profits while avoiding common pitfalls and misleading advice. Whether you have questions about Stamp Duty Land Tax reliefs, VAT implications, or property portfolio restructuring, our team of qualified experts is ready to provide tailored support for your specific needs.  

Contact us today at simon@deeksvat.co.uk to streamline your property-related affairs and achieve your financial goals, keeping abreast of the latest developments in tax law and ESG considerations.