Incorporation Relief UK: Your Simple Guide to Business Tax Planning

Turning a business into a limited company has become a common plan for many business owners. The reasons for doing this have changed over time. While tax planning used to be the main reason, the way tax rules are now means it’s important to think carefully if you’re only incorporating for tax savings, especially if your business makes less than about £50,000 profit. In these cases, the extra paperwork of running a company can sometimes cost more than the tax you save. Also, new ideas about being good for the environment, society, and how a company is run (called ESG) are now affecting how businesses think about incorporating, which also affects tax planning and how people see the business.

What is Incorporation Relief?

When you move your business to a limited company, you transfer business items like goodwill (the good name and reputation of your business) and land/buildings. This usually means you might have to pay Capital Gains Tax (CGT). Incorporation Relief (IR) is a special tax rule that lets you delay paying this CGT. This is a very helpful part of tax planning for many businesses.

The meaning of Incorporation Relief is simple: it “rolls over” or defers the Capital Gains Tax you would normally pay when you move assets from your sole trader or partnership business into a new limited company in exchange for shares. This means you don’t pay the tax straight away.

Conditions for Incorporation Relief (Rules & Eligibility)

For incorporation relief to apply, certain conditions must be met automatically. If these rules aren’t followed, you might not be able to claim it.

Here are the key incorporation relief conditions you need to know:

• Business as a Going Concern: Your business must be transferred as an active, continuing business, not just a collection of assets.
• All Assets (Except Cash): You must transfer all the assets of the business (except any cash) to the new company. This includes things like goodwill, equipment, and any land and buildings.
• Shares as Payment: The only thing you get back from the company for transferring your business must be shares in that company. If you get cash as part of the payment, the amount of relief you get will be reduced.
• Property Transfers: If you transfer land or buildings to the company, you might need to change your mortgage.

Knowing these incorporation relief eligibility rules is key to making a successful claim.

How Incorporation Relief Works: Capital Gains Tax & Shares

Under Incorporation Relief, the CGT payment is delayed or ‘rolled over’ until you eventually sell your company shares. This deferred gain is then taken off the original value of your shares. This means when you do sell your shares later, the gain you pay tax on is worked out based on the final sale price, but with that deferred amount already taken into account.

Can You Disapply Incorporation Relief? (Election & When to Do It)

Even though incorporation relief applies automatically if all the conditions are met, you actually have the choice to stop it from applying (this is called disapplying incorporation relief or making an election to disapply it).

There are times when disapplying incorporation relief might be a better idea. For example:

• If the gain you are deferring is small enough to be covered by your annual Capital Gains Tax allowance (called the annual exemption).
• If you have other losses you can use to reduce the gain, so you don’t need to defer it.
• If you are only transferring some of your business assets, or if the shares you get in return are hard to sell. In these cases, you might not be able to claim IR anyway.

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. 

Incorporation Relief and Loans (HMRC ESC D32)

Sometimes, a business owner might want to move a loan they have to the new company. HMRC (HM Revenue & Customs) has a special rule for this situation called Concession (or Statement of Practice) ESC D32. This helps to make sure that incorporation relief can still apply even if a loan is involved.

However, moving a loan can sometimes be tricky with the bank, as personal loans and company loans have different rules. Working together with your lender and changing the loan terms can solve these problems and make sure Incorporation Relief is still available. You can find more incorporation relief HMRC guidance on this.

Alternatives to Incorporation Relief (Business Asset Disposal Relief & Gift Relief)

In some cases, it might be better to look at other ways to save on CGT, especially if you have assets that you won’t be transferring to the company. Other options include:

• Business Asset Disposal Relief: This relief (formerly Entrepreneurs’ Relief) can reduce the amount of CGT you pay when you sell certain business assets or shares.
• Gift Relief: If you gift certain assets, you might be able to claim Gift Relief, which also defers CGT.

You might choose to disapply incorporation relief or keep some non-cash assets outside the company as part of your overall tax planning strategy.

Expert Guidance for Complex Property Taxes & Incorporation Relief

Dealing with complicated property taxes and incorporation relief often needs advice from qualified experts. At Deeks VAT Limited, we are specialists in helping property clients with their tax, legal, and accounting matters all in one place.

Our expertise helps landlords, developers, and business owners get the most from their profits while avoiding common mistakes and bad advice. Whether you have questions about Stamp Duty Land Tax relief, VAT implications, how to set up your property portfolio, or specifically about incorporation relief UK rules, our team of qualified experts is ready to give you tailored support for your specific needs. We offer a comprehensive incorporation relief guide through our consultancy.

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.