Incorporation Relief — Going Limited Without a Capital Gains Tax Bill (2026)

What Happens to Your Assets When You Incorporate

As a sole trader, you and your business are the same legal person. When you incorporate, you create a separate legal entity — the limited company — and you transfer the business into it. That transfer is a disposal for Capital Gains Tax purposes, and because you and the company are "connected persons", HMRC values the transfer at market value rather than whatever you actually charge the company.

The assets that move across typically include the goodwill of the business (the value of your reputation, customer base and trading name), plant and equipment such as vans, tools and machinery, work in progress, and sometimes commercial property if you own a yard or unit. Each of these can carry a gain — the difference between its market value and its base cost — and without relief, that gain is taxable in the year you incorporate.

For a well-established trade with a strong reputation, the goodwill figure alone can run into tens of thousands of pounds. That is exactly the kind of gain incorporation relief is designed to deal with.

How Incorporation Relief Works (TCGA 1992 s162)

Incorporation relief sits in section 162 of the Taxation of Chargeable Gains Act 1992. Where it applies, the gain on the business assets you transfer is not charged when you incorporate. Instead, it is deferred — rolled into the base cost of the shares you receive in the new company. You only pay Capital Gains Tax on that deferred gain later, if and when you sell or dispose of the shares.

The relief is automatic if the conditions are met — you do not need to claim it, it applies by default. The three core conditions are:

• You transfer the business as a going concern — a live, trading business rather than a closed-down one.
• You transfer all the assets of the business (you are allowed to leave out cash).
• The business is transferred in exchange wholly or partly for shares in the company.

If all three are satisfied, relief applies automatically. You can elect out in writing if it suits your circumstances — for example, if you want to crystallise a gain now to use an available allowance or relief — but that election has a deadline, so it is a deliberate decision to take with advice, not a default.

All Shares vs Part Cash — The Trade-Off

The amount of gain you can defer depends on how much of the consideration you take as shares. If you take the entire value of the business in shares, the whole gain is deferred. If you take part of the value in some other form — typically a director's loan account credited with cash you can draw down later — then only the share-funded proportion of the gain is relieved. The cash element is treated as a disposal now and may be taxable.

There is a genuine trade-off here. Taking shares for the full value maximises the deferral but locks the value into the company. Taking part as a loan account gives you a pot you can withdraw tax-free over time (it is a repayment of money you are owed, not income), but it reduces the gain that qualifies for relief. The right split depends on your goodwill valuation, your other allowances, and how soon you want to draw funds out. This is one of the central decisions an accountant will model for you.

Why the Goodwill Rules Changed

Goodwill used to be the headline reason trades incorporated. Until December 2014, you could sell goodwill to your own new company, claim Entrepreneurs' Relief (now Business Asset Disposal Relief) so the gain was taxed at just 10%, and the company could amortise the purchased goodwill for a corporation tax deduction. It was a powerful combination — and HMRC closed it down.

From 3 December 2014, Business Asset Disposal Relief was withdrawn on goodwill transferred to a close company that the seller controls — so in most incorporations you can no longer get the 10% rate on internally generated goodwill. Separately, from April 2015 the corporation tax deduction for amortising goodwill acquired on incorporation from a related party was restricted, removing the deduction the company used to claim.

The practical upshot is that the old "sell goodwill to your company at 10% and amortise it" play is gone for most owner-managed trades. That makes incorporation relief — deferring the goodwill gain into the shares rather than trying to tax it cheaply now — the more relevant route for the typical growing sole trader today.

Other Reliefs to Weigh — Gift / Holdover Relief (s165)

Section 162 relief is not the only option. Gift relief (holdover relief) under section 165 of TCGA 1992 can also defer the gain on business assets transferred to a company. The key difference is that holdover relief lets you choose which assets to transfer — you do not have to move the whole business or take shares for the value — so it offers more flexibility, for example where you want to keep a property outside the company.

With holdover relief the gain is held over against the company's base cost in the asset, rather than rolled into your shares. Which relief suits you depends on what you are transferring, what you want to keep personally, and your longer-term plans for the company and the assets. The two routes produce different outcomes on a future sale, so they should be compared, not assumed.

Why Trades Incorporate (and the Admin Trade-Off)

Set the tax mechanics aside for a moment — the reasons a sole trader trade goes limited are practical:

• Tax efficiency at higher profits: Once profits comfortably exceed what you need to live on, the company structure (corporation tax plus a salary-and-dividend mix) can be more efficient than paying income tax and Class 4 National Insurance on the whole lot as a sole trader. The crossover point depends on your numbers and on current rates.
• Limited liability: A company is a separate legal person, so its debts are generally its own. For trades carrying real commercial risk — large contracts, sub-contractors, expensive plant — that separation matters.
• Credibility and contracts: Some main contractors, commercial clients and tenders prefer or require a limited company to deal with.

The flip side is admin. A company means annual accounts filed at Companies House, a corporation tax return, a confirmation statement, running PAYE if you pay yourself a salary, and stricter rules about taking money out — you cannot just dip into the business account the way a sole trader can. There is a real bookkeeping and compliance cost, and for a smaller trade that cost can outweigh the tax saving. Incorporation is also a public step: your company details and accounts become a matter of public record.

Get an Accountant to Model It First

This is the part to take seriously: incorporation is hard to reverse. Disincorporating — unwinding a company back to a sole trade — is messy, can itself trigger tax charges, and there is no easy "undo". So the decision needs to be right before you make it, not corrected afterwards.

A good accountant will value your goodwill defensibly, model the share-versus-loan-account split, compare section 162 relief against holdover relief, project the corporation-tax-plus-dividend position against your current sole trader tax, and factor in the ongoing compliance cost. They will also flag knock-on issues people forget — VAT registration carrying across, CIS status, mortgages and lending that may treat company income differently, and any commercial property and its Stamp Duty Land Tax exposure on transfer.

Treat the accountant's fee as part of the cost of incorporating, not an optional extra. A few hundred pounds of advice up front is cheap against getting a five-figure goodwill valuation or a relief condition wrong.

A Note on Rates and Thresholds

Capital Gains Tax rates, the annual exempt amount, corporation tax rates, dividend allowances and the detail of these reliefs all change from one Budget to the next, and some have moved sharply in recent years. The framing in this article reflects the position for UK tradespeople in 2026, but you should always confirm the current figures and rules with HMRC guidance or your accountant before acting. Nothing here is personal tax advice.

Quick Reference: Incorporation Relief at a Glance