If you are a sole trader and you have decided to incorporate your business into a limited company, you are looking at a potential capital gains tax (CGT) bill on the transfer of your business assets. That is the default position. HMRC treats the transfer as a disposal of your assets to the company, and a disposal triggers CGT on any gain above what you originally paid for them.
But there is a relief that can wipe out that tax bill entirely. It is called incorporation relief, and it is set out in TCGA 1992, s.162. If you meet the conditions, the gain on your business assets is deferred. You do not pay CGT now. The company inherits your original tax cost in the assets, and the gain crystalises when the company eventually sells them or you sell your shares.
This article explains exactly how to transfer a sole trader to a limited company without triggering a CGT bill. We cover the conditions, the mechanics, the form you need to file, and the common mistakes that cost people money.
What Is Incorporation Relief?
Incorporation relief is a statutory relief that applies automatically when you transfer a business as a going concern to a limited company in exchange for shares in that company. The relief defers the capital gain. You do not pay CGT on the transfer. Instead, the gain is rolled into the base cost of the shares you receive.
Think of it as HMRC saying: "You have not really disposed of the business. You have just changed the legal wrapper. So we will treat the gain as if it has not happened yet." The gain is frozen until you sell the shares or the company sells the assets.
The relief is not optional in the sense that you elect into it. If the conditions are met, it applies automatically. But you can elect out of it if you want to pay CGT now (for example, if you have brought-forward losses that would wipe out the gain). That election must be made in writing to HMRC within two years of the transfer.
The Conditions for Incorporation Relief
Four conditions must be satisfied for the relief to apply. Miss any one of them, and the transfer is treated as a normal disposal with CGT due in full.
Condition 1: You Transfer a Business as a Going Concern
You must transfer the entire business, not just some of its assets. HMRC looks at whether the business continues to trade after the transfer, just in a different legal structure. If you cherry-pick assets and leave some behind, or if you stop trading before the transfer, the relief is lost.
What counts as a business? HMRC uses the common-law meaning: a serious undertaking earnestly pursued with a view to profit. A side hustle that is not yet trading properly may not qualify. A fully operational sole trader business with regular customers, invoices, and ongoing contracts almost certainly does.
Condition 2: The Transfer Is Wholly or Partly in Exchange for Shares
You must receive shares in the company as consideration for the transfer. You can also receive cash or other assets (loan account credit, for example), but the relief only applies to the proportion of the gain that is represented by shares.
Here is the key point. If you take £50,000 in shares and £50,000 in cash, only 50% of the gain is deferred. The other 50% is immediately chargeable to CGT. This is the most common trap we see. People take a large directors' loan account credit or withdraw cash from the company on day one, and they lose the relief on that proportion of the gain.
Condition 3: The Company Issues Shares to You
The shares must be issued to you personally. If the shares are issued to a trust or to a nominee, the relief does not apply. The shares must be ordinary shares or another class that carries rights to the company's profits and assets. Preference shares with fixed dividend rights may not qualify in all cases.
Condition 4: The Transfer Includes All Assets of the Business (or All Assets Other Than Cash)
This condition is strict. You must transfer all the assets used in the business. You cannot retain the freehold of your business premises and lease it to the company. You cannot keep the goodwill in your personal name and license it to the company. If you do, the relief fails on the whole transfer, not just the retained asset.
Cash is the one exception. You can retain cash without breaking the relief, because cash is not a chargeable asset for CGT purposes. But everything else must go across: goodwill, equipment, stock, work in progress, trade debtors, contracts, intellectual property, domain names, customer lists.
How the Relief Works: A Worked Example
Let us run a real example. Sarah runs a marketing consultancy in Bristol as a sole trader. She has been trading for eight years. She decides to incorporate into a limited company.
Sarah's business assets on transfer are worth £120,000 in total. Her original cost for those assets (mostly equipment, some goodwill she acquired when she bought a small competitor) was £20,000. Her chargeable gain is £100,000.
She transfers the business to her new company in exchange for 100 ordinary shares valued at £100,000, plus the company takes over her business bank account balance of £20,000 as a directors' loan account credit (cash).
The consideration is £100,000 in shares and £20,000 in cash (the loan account). The shares represent 83.33% of the total consideration. The relief defers 83.33% of the gain, which is £83,333. The remaining 16.67%, which is £16,667, is immediately chargeable to CGT.
If Sarah had taken only shares and no cash or loan account, the full £100,000 gain would be deferred. She would pay zero CGT on incorporation.
The deferred gain is deducted from the base cost of her shares. Her shares have a market value of £100,000, but their base cost for CGT purposes is reduced to £16,667 (£100,000 minus £83,333 deferred gain). When she eventually sells the shares, the deferred gain will crystalise.
Goodwill: The Trickiest Asset
Goodwill is often the largest asset in a service business. It is also the one that causes the most problems on incorporation. HMRC scrutinises goodwill valuations closely, particularly where the business is a personal service company or where the sole trader is the main income generator.
If you are a consultant, a contractor, or a freelancer, your personal reputation and skill set are not goodwill that can be transferred to a company. HMRC takes the view that personal goodwill has no value because it cannot be sold separately from you. If you value your goodwill at £200,000 and HMRC challenges it, you could face a CGT bill plus interest and penalties.
Get a professional valuation from a qualified business valuer before you incorporate. Do not guess the goodwill figure. HMRC has a specialist team that reviews incorporation valuations, and they will open an enquiry if the numbers look aggressive.
For most contractors and consultants, the goodwill value is low or zero. That is not a problem. It just means there is less gain to defer. The relief still works on whatever gain there is.
What About VAT?
Transferring a business as a going concern (TOGC) for VAT purposes is separate from incorporation relief for CGT. If you meet the TOGC conditions, no VAT is charged on the transfer of the business assets. The new company steps into your VAT registration number and your VAT history.
The TOGC rules require that the business is transferred as a going concern, the buyer intends to use the assets in the same kind of business, and the buyer is VAT registered or registers immediately after the transfer. If you are VAT registered as a sole trader, your new company must be VAT registered before the transfer takes place, or the TOGC treatment fails and VAT becomes due on the assets.
Our VAT and Making Tax Digital content covers the TOGC rules in more detail.
The Practical Steps to Transfer Without a CGT Bill
Here is the sequence we recommend to clients. Follow it in order.
- Get a business valuation. Have a qualified valuer assess the market value of your business assets, including goodwill, equipment, stock, and intellectual property. This valuation sets the consideration for the transfer.
- Incorporate the company. Register the new limited company at Companies House. Make sure the company name, SIC code, and director details are correct. The company must not have traded before the transfer.
- Register the company for VAT. If you are VAT registered as a sole trader, the new company must be VAT registered before the transfer date. Use form VAT1 or VAT2 depending on the structure. HMRC can take up to 30 days to process the registration, so start early.
- Open a business bank account. The company needs its own bank account. You will transfer the business bank balance into this account.
- Prepare the transfer agreement. This is a legal document that transfers the business assets from you personally to the company. It sets out the consideration (shares, cash, loan account) and the effective date of transfer. Your solicitor or accountant should draft this.
- Issue the shares. The company issues shares to you in exchange for the business assets. The share certificate and the company's register of members must reflect this accurately.
- File the incorporation relief claim. There is no specific HMRC form for incorporation relief. You claim it by including the relevant computations in your self assessment tax return for the year of transfer. Use the capital gains pages (SA108) and include a white-space disclosure explaining the relief claimed. Keep the transfer agreement and valuation report with your records.
- Notify HMRC of the company's commencement. Use form CT41G to tell HMRC the company has started trading. This triggers the corporation tax registration process.
What Happens to Your Tax Liabilities After Transfer?
Your sole trader business stops on the date of transfer. You file a final self assessment tax return for the period up to that date, declaring the profits up to cessation and the capital gain (or the deferred gain) on the transfer. The company files its first corporation tax return for the period from the transfer date to its first year-end.
Your personal tax liabilities from the sole trader period remain your responsibility. The company does not inherit them. Make sure you have set aside enough cash to pay any outstanding income tax and Class 4 NIC from the sole trader period.
Going forward, you pay yourself from the company through a combination of salary and dividends. The director pay and dividends structure is different from sole trader drawings, and the tax treatment changes significantly. You will need to run a payroll and file RTI returns to HMRC each month or quarter.
Common Mistakes That Cost People Money
We see the same errors repeatedly. Here are the ones to avoid.
- Taking too much cash. If you take more than a trivial amount of cash or loan account credit, you lose incorporation relief on that proportion of the gain. Keep the cash element as low as possible. Ideally zero.
- Retaining assets. Keeping the freehold of the business premises or retaining the goodwill in your personal name breaks the relief on the whole transfer. Transfer everything except cash.
- Overvaluing goodwill. HMRC will challenge inflated goodwill valuations, particularly in personal service businesses. A challenge can take 18 months to resolve and may result in a tax bill plus interest.
- Missing the TOGC conditions. If the company is not VAT registered before the transfer, the transfer of assets is subject to VAT at 20%. That is an immediate cost that cannot be reclaimed.
- Not filing the claim properly. If you do not include the capital gains computation in your self assessment return, HMRC may treat the transfer as a normal disposal and issue a determination for the CGT due. Correcting this after the fact requires a formal amendment or a discovery claim.
- Ignoring the settlement legislation. If you transfer the business to a company and then give shares to your spouse or children, the settlement provisions in ITTOIA 2005, Part 5, Chapter 5 may apply. The income from those shares could be treated as yours for tax purposes. This is a separate issue from incorporation relief, but it catches people out regularly.
When Should You Not Use Incorporation Relief?
There are situations where paying CGT now is actually better than deferring it. If you have brought-forward capital losses that would wipe out the gain, you may want to trigger the gain deliberately and use the losses. The CGT rate for business asset disposals is 14% for 2025/26, rising to 18% from April 2026. If your gain is small, paying the tax now and resetting the base cost of your shares to market value may be simpler than tracking the deferred gain for years.
If you are planning to sell the company within a few years, the deferred gain will crystalise on the share sale anyway. You may prefer to pay CGT now at 14% (or 10% if you qualify for Business Asset Disposal Relief on the incorporation itself, which is rare but possible) rather than deferring it and paying a higher rate later.
These decisions require a proper calculation. Speak to an accountant before you commit to a particular structure. Our services page explains how we help clients through the incorporation process.
What If You Already Transferred and Did Not Claim the Relief?
If you transferred your sole trader business to a limited company in a previous tax year and did not claim incorporation relief on your self assessment return, you may still be able to make a claim. The time limit is generally two years from the 31 January following the tax year of transfer. For a transfer in the 2024/25 tax year, the deadline is 31 January 2028.
If the deadline has passed, you can still ask HMRC to accept a late claim under ESC D33 (extra-statutory concession). HMRC will consider late claims if you have a reasonable excuse and you apply promptly once you discover the omission. This is not guaranteed, but it is worth trying.
If you paid CGT on the transfer and should have claimed relief, you can amend your self assessment return within 12 months of the filing deadline. After that, you need to make a formal overpayment relief claim. The time limit for overpayment relief is four years from the end of the tax year in which the return was filed.
Get professional advice if you are in this situation. The rules are technical, and the consequences of getting it wrong are a lost relief that cannot be recovered.
Incorporation Relief and Business Asset Disposal Relief
If you incorporate and then sell the company shares later, you may qualify for Business Asset Disposal Relief (BADR) on the gain from the share sale, including the deferred gain from incorporation. BADR gives a 14% CGT rate for 2025/26 (rising to 18% from April 2026) on the first £1 million of lifetime gains.
The conditions for BADR on share disposals are: you must be an employee or officer of the company, and the company must be a trading company (or holding company of a trading group). You must have held the shares for at least two years before the disposal.
The deferred gain from incorporation relief is treated as part of the gain on the share disposal. So you get BADR on the full gain if you meet the conditions. This is a powerful combination. You defer the gain on incorporation and then pay 14% (or 18% from 2026) on the deferred gain when you sell the shares.
Our exit and capital gains content covers BADR in detail.
Final Thoughts
Incorporation relief is one of the most valuable tax reliefs available to sole traders who want to move into a limited company structure. It allows you to transfer your business without an immediate CGT bill, deferring the gain until you sell the shares or the company sells the assets.
The relief is automatic if you meet the conditions. But the conditions are strict, and the traps are real. Taking cash, retaining assets, or overvaluing goodwill can cost you the relief or trigger an HMRC enquiry.
If you are considering incorporating your sole trader business, talk to an accountant before you do anything. We are ICAEW qualified accountants with years of experience in incorporations across every sector. We will help you structure the transfer correctly, value the assets properly, and file the right paperwork.
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