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CGT Incorporation Relief

4 July 2024

Where a taxpayer owns a business as a sole trader or in partnership, a capital gain will be deemed to arise if the business is converted into a company by reference to the market value of the business assets including goodwill. This could give rise

If a taxpayer, as a sole trader or in partnership, owns a business, the conversion of the business into a company will deem a capital gain to arise. This is based on the market value of the business assets, including goodwill, and could lead to a chargeable gain based on the difference between the market value of the assets and their original cost.

In most cases, the business will incorporate in a way that satisfies the conditions necessary to secure incorporation relief. One such condition is the transfer of the entire business with all its assets (or all its assets excluding cash) as a going concern, wholly or partly, in exchange for shares in the new company.

It’s important to note that if the necessary conditions are met, incorporation relief applies automatically, eliminating the need to make a claim. The relief operates by reducing the base cost of the new assets by a proportion of the gain that arises from the disposal of the old assets.

Even though the relief applies automatically, it’s possible to elect in writing for incorporation relief not to apply. You must make this election before the second anniversary of 31 January following the tax year in which the transfer took place. For example, for a transfer made in the current 2024-25 tax year, you must make the election by 31 January 2028. If you dispose of the shares in the year following the business’s incorporation, the election deadline reduces by one year.

Source: HM Revenue & Customs Tue, 02 Jul 2024 00:00:00 +0100

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