Moving your business into a company is a disposal for Capital Gains Tax purposes. Incorporation relief usually means you pay nothing at the point of the move.
Zazentax Incorporation Relief Series, Part 1 of 3 · Updated July 2026 · Reading time: about 6 minutes
Sole traders who succeed tend to reach the same crossroads. The business has grown, the liability exposure feels too personal, or a limited company simply looks more credible to customers and lenders. The solution, forming a company and transferring the business into it, is called incorporating, and it raises an immediate tax question: if the business has grown in value since it started, does moving it into a company trigger a tax bill on that growth, even though nothing has actually been sold to an outsider?
The answer is that a transfer to a company is indeed treated as a disposal for Capital Gains Tax, usually shortened to CGT, because the sole trader and their new company are legally separate and the law deems the transfer to happen at market value. Fortunately, incorporation relief exists to defer that gain in almost every ordinary case, provided three specific conditions are satisfied. Understanding those conditions, and what the relief actually does to the numbers, is the difference between a smooth transition and an unwelcome surprise.
A Worked Example
Priya has run a bakery as a sole trader for over a decade. She incorporates the business into a new company, Priya Bakes Ltd, transferring the premises, the goodwill built up over the years, her equipment and her current assets such as cash and money owed by customers. The premises originally cost her £85,000 and are now worth £220,000, giving a gain of £135,000. The goodwill, essentially the value of her reputation and customer base, cost nothing to build and is valued at £130,000 on the day of the transfer, so the whole £130,000 is gain. Her equipment and current assets do not produce a taxable gain, the equipment because it falls under an exemption for smaller items of machinery, and the current assets because cash and debts owed are simply outside the scope of Capital Gains Tax altogether.
Priya’s total chargeable gain before any relief is £135,000 plus £130,000, which equals £265,000. The new company issues her shares worth £425,000, representing the full value of everything transferred, and pays her nothing in cash or any other form. Because the entire consideration is shares, and because Priya has satisfied the conditions described below, incorporation relief defers her whole gain. Her chargeable gain becomes nil, and instead her new shares carry a reduced base cost of £425,000 minus £265,000, which equals £160,000. When Priya eventually sells her shares in the company, that £265,000 of deferred gain becomes part of her calculation then, alongside whatever her shares have grown by since incorporation.
Key point: Incorporation relief works by taking the gains on the business assets transferred and rolling them into the base cost of the shares received in exchange. The tax is not cancelled; it waits inside the shares until they are eventually sold.
The Three Conditions, and Why They Are Strict
Incorporation relief is only available where three conditions are all satisfied, and the legislation gives no room for a partial pass. First, the business transferred must be a going concern, meaning a live, operating trade rather than a collection of assets being wound down. Second, all of the assets of the trade, with the single exception of cash, must be transferred to the company; a sole trader who wants to keep a business asset such as a building outside the company will not qualify for this relief at all, on any of the assets transferred, however small the retained item might be. Third, the consideration paid by the company to the individual must be wholly or partly in the form of shares; a transfer paid for entirely in cash or in a loan from the company receives no incorporation relief whatsoever.
Notably, incorporation relief is automatic wherever these three conditions are met. No claim needs to be filed, and unlike gift relief, the taxpayer cannot simply choose to leave part of the gain in charge in order to make use of their annual exempt amount, the £3,000 of gains each individual can realise tax free every year for 2026/27. If the conditions are satisfied, the relief applies in full according to the formula, whether the taxpayer wants it to or not.
Action required: Before incorporating, list every asset the business currently owns and decide honestly whether each one is moving into the company. If you plan to keep even one qualifying asset back, for instance the freehold building, incorporation relief will not apply to anything, and a different plan, covered in Part 3 of this series, is needed instead.
What Happens Next in This Series
Priya’s case is the clean scenario: every asset transferred, every penny of consideration paid in shares, and the full gain deferred as a result. Many incorporations are not that tidy. Companies often leave part of the value owing on a director’s loan account rather than issuing shares for everything, which shrinks the relief in a specific, calculable way, and that shrinkage interacts awkwardly with a separate rule about goodwill that catches out almost everyone who is not warned about it in advance. Part 2 of this series works through both. Part 3 covers what to do if incorporation relief does not fit your plans at all, including the point at which a taxpayer can choose to switch it off.
Key Takeaways
- Transferring a sole trader business into a company is a disposal for Capital Gains Tax at deemed market value, even though nothing is sold to an outside party.
- Incorporation relief rolls the gain on business assets into the base cost of the shares received, deferring the tax until the shares are eventually sold.
- Three conditions must all be met: the business must be a going concern, every asset except cash must transfer, and the company must pay at least partly in shares.
- The relief is automatic where the conditions are met; there is no election and no way to leave gain in charge deliberately to use the annual exempt amount.
- Keeping back even one qualifying business asset when incorporating removes the relief entirely, not just for that asset.
Thinking About Incorporating Your Business?
Zazentax checks whether your planned transfer meets all three conditions, calculates the deferred gain and your new share base cost, and flags any asset that would break the relief before you sign anything. Get the structure right from day one.
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