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Business Incorporation Relief

It is possible to delay paying Capital Gains Tax if a business owner or partner transfers the business to another company in return for shares. Incorporation relief means that a business owner or partner won’t be liable to pay any tax until he / she sell or dispose of the shares.

To qualify for Incorporation relief the two most important conditions are:

• To be in a business partnership or operate as a sole trader
• To transfer the business and all the assets, apart from cash, in return for shares in a company

A business owner or business partner will be automatically eligible for Incorporation relief and don’t have to claim it. To compute the payable Capital Gains Tax, deduct the gain, made by selling the business, from the market value of shares received. Let’s understand this by an example; a business owner or partner transfers the business in return of shares worth £100,000 and the profit made is £60,000. If the shares are sold later, their cost for computation of Capital gains tax will be £40,000 (£100,000 - £60,000).

In certain cases, the owner / partner might receive shares and cash when transferring the business. It is also possible to get incorporation relief on the proportion of the business exchanged – Capital gains tax is payable on cash. To make it simple to understand, assume the value of the business, when it is transferred, is £100,000. 80% is received in shares and 20% in cash. In this transaction, profit / gain equal £50,000. Hence, 80% of gain from shares i.e. £40,000 (80% * £50,000) can be postponed until the shares are sold but capital gains tax will have to be paid on 20% of cash gain i.e. (20% * £50,000) while filing the next tax return.

Computation of Incorporation relief

The following step will help with the computation of Incorporation relief

Step 1: We sum up all the consideration, i.e. any cash received and the market value of shares

Step 2: Computation of any Capital Gains on declarable assets such as goodwill and property

Step 3: Calculate the gain not liable to Capital Gains Tax:

Gains not liable to Capital gains tax = Gains (computed in Step 2) * Market value of shares / Cash + Market value of shares
The gains not chargeable are fundamentally rolled over.

Step 4: Calculating the deemed cost of new shares:
Deemed cost of new shares = cost of shares – gain not rolled over (step 3)

We help businesses with formulating the complete structure and adopt the best possible approach to have maximum gains. With incorporation relief, we are basically deferring capital gains tax payable on the sale of taxable assets such as goodwill and property, and as a result reducing the acquisition cost of shares received for the transfer of business to another company. Thus, capital gains tax will only incur once the shares are sold

What we do

• Tax saving advice to minimize the tax exposure of our clients and formulate the best tax agreements
• Creating an environment where our clients face minimal business incorporation relief issues
• Building trust in the market and helping clients with a streamlined process

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