Incorporation relief demands you hand over everything except cash. Keep back the building and it fails completely, but a joint gift relief election can step in to fill the gap.
Zazentax Incorporation Relief Series, Part 3 of 3 · Updated July 2026 · Reading time: about 6 minutes
Parts 1 and 2 of this series assumed a business owner transferring everything into their new company and wanting the largest possible deferral. Not everyone wants that. A common and entirely sensible plan is to keep the freehold property in personal ownership, perhaps to avoid Stamp Duty Land Tax on the transfer, to preserve flexibility, or simply because a pension arrangement already holds the building. As Part 1 explained, incorporation relief has no tolerance for this: the second of its three conditions requires every business asset except cash to move into the company, and keeping back even one qualifying asset disqualifies the relief entirely, not just for the item retained.
Fortunately, this is not the end of the road. A joint election under the gift relief rules can step in as an alternative, covering the assets that do transfer even though the building does not.
How Gift Relief Fills the Gap
Nadia runs a physiotherapy clinic as a sole trader and wants to incorporate, but she intends to keep her clinic’s freehold building in her own name and rent it to the new company on ordinary commercial terms. Because the building never transfers, incorporation relief is unavailable, full stop, on everything else she does transfer as well, which in her case is the goodwill of the practice, valued at £150,000 with a nil original cost, exchanged entirely for shares in the new company.
Nadia and her new company can instead make a joint election under gift relief for the goodwill, exactly as described in this site’s earlier series on gift relief. Because the goodwill is a qualifying business asset and the transfer is to a company she controls, the whole gain of £150,000 can be deferred by election. The mechanism, however, works differently from incorporation relief in a way that catches people out if they assume the two reliefs behave identically.
Key point: Incorporation relief reduces the base cost of the shares the individual receives. Gift relief instead reduces the base cost of the asset inside the company that received it. The two reliefs move the deferred gain to different places, and mixing them up leads to the wrong numbers on a future sale.
In Nadia’s case, the £150,000 deferred gain reduces the company’s base cost in the goodwill it now owns, from £150,000 down to nil. Her own shares are entirely unaffected by the election and retain a base cost equal to their full value of £150,000. Consequently, when Nadia eventually sells her shares, her gain is calculated from the full £150,000 base cost, exactly as if no deferral had ever happened to her personally. The deferred tax instead surfaces inside the company, if and when the company ever sells the goodwill onward, a different taxpayer entirely, subject to corporation tax rather than Capital Gains Tax.
Choosing to Switch Incorporation Relief Off Deliberately
A separate scenario arises where all three conditions for incorporation relief are met, so the relief applies automatically, but the taxpayer would actually prefer not to have it. This might suit someone who has capital losses they want to use up, or who knows their shares will not qualify for Business Asset Disposal Relief on a future sale, perhaps because they plan to step back from working in the company, and would rather pay tax now on gains eligible for that relief’s lower rate than defer them into a future sale taxed at the standard rate instead.
The law allows exactly this through an election to disapply incorporation relief, made under separate legislation from the relief itself. The deadline depends on how long the shares are held. Farrukh incorporates his consultancy business in August 2026, which falls in the 2026/27 tax year. If he sells all of his shares by 5 April 2027, meaning by the end of the tax year following incorporation, he must make his election to disapply by 31 January 2028, one year after the 31 January that follows the year of incorporation. If instead he keeps his shares beyond 5 April 2027, the deadline moves out to 31 January 2029, two years after that same date. Missing the relevant deadline leaves incorporation relief in place by default, since it applies automatically whenever the three underlying conditions are satisfied.
Action required: If you are incorporating and expect to sell your shares within a year or two, or you are carrying capital losses forward, calculate both outcomes, with and without incorporation relief, before your filing deadline passes. Once the election window closes, the automatic relief is locked in.
Series Summary
Across this series, three ideas sit at the centre of every incorporation decision. Incorporation relief gives generous automatic deferral, but only where every asset transfers and only in proportion to the shares received. Goodwill retained under your own control never benefits from the reduced Business Asset Disposal Relief rate, whatever else is arranged. And where incorporation relief cannot apply, because an asset is deliberately kept outside the company, gift relief remains available as a genuine alternative, provided both parties understand that it reduces the company’s base cost rather than the shareholder’s own.
Key Takeaways
- Retaining any qualifying business asset outside the new company disqualifies incorporation relief entirely, not only for the asset kept back.
- A joint gift relief election can defer the gain on assets that do transfer, even when incorporation relief itself is unavailable.
- Gift relief reduces the recipient company’s base cost in the asset; incorporation relief reduces the shareholder’s own base cost in their shares. The two are not interchangeable.
- Incorporation relief is automatic, but can be switched off by an election to disapply, useful where losses need using or the shares will not later qualify for Business Asset Disposal Relief.
- The disapply election deadline is one or two years after the 31 January following the tax year of incorporation, depending on how soon the shares are sold.
Keeping an Asset Back When You Incorporate?
Structure the deal properly from the start. Zazentax can confirm whether incorporation relief survives your plans, put a joint gift relief election in place where it does not, and check the disapply deadline before it passes.
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