Incorporation relief: How it works and other ‘twists’

The first point to note is that for business incorporations on or after 6 April 2026, FA 2026, s 39 amends the capital gains tax incorporation relief provisions in TCGA 1992, s 162, requiring a claim to be made. Previously, the application of s 162 was automatic if the requirements of s 162 were met, the main one being that what is transferred to the company is a ‘business’ and not merely a collection of assets. This issue most frequently arises in relation to property letting, a leading case being Ramsay v HMRC [2013] UKUT 0226 (TCC). Mrs Ramsay succeeded in obtaining relief under TCGA 1992, s 162 but the issue is highly fact sensitive, and the arguments may be finely balanced (see HMRC’s Capital Gains Manual at CG65715).

Satisfying the conditions

The requirements of TCGA 1992, s 162 are that:

• all assets of the business are transferred, apart from cash; and
• the consideration for the transfer must consist wholly or partly of the issue of shares in the company.

The company taking over the liabilities of the business does not normally count as consideration (see HMRC’s ESC D32 and Capital Gains Manual at CG65745) but see below. It is quite common for the consideration to consist partly of shares and partly of cash, and indeed, this may be most tax efficient; TCGA 1992, s 162 refers to the chargeable assets transferred as the ‘old assets’ and the shares in the company as the ‘new assets’. Under TCGA 1992, s 162(2), the aggregate gains and losses on the old assets shall be reduced by an ‘amount’ calculated applying the formula A/B where:

‘A’ is the ‘cost’ of the new assets; and

‘B’ is the value of the whole consideration.

The cost of the new assets is expressed as the amount which would be deductible for CGT purposes on a sale of the new assets, which would be the market value of the shares acquired.

Incorporation relief in action

The working of the formula is best illustrated by a simple example.

Example: Calculating incorporation relief

Ben transfers his garage business to a company in return for shares in the company and £50,000 cash to be credited to his director’s loan account. The only chargeable asset is the business property worth £400,000, which cost £250,000. The value of the business, including net current assets, is £500,000. The ‘cost’ of the ‘new assets, being the value of the shares in the company, is £500,000 – £50,000 = £450,000.

The ‘amount’ to be deducted from the chargeable gain is:

£150,000 x (£450,000 / £500,000) = £135,000

The cost of the shares is therefore £450,000 – £135,000 = £315,000.

The chargeable gain apportioned to the cash consideration is £15,000.

The company acquires the property at its market value of £450,000

The above example is intended to simply demonstrate the principle involved, but further examples can be found in HMRC’s guidance at CG65755 and CG65760. In February 2024, the Chartered Institute of Taxation (CIOT) wrote to HMRC concerning ‘Uncertainties in relation to the application of ESC D32’, in particular as regards what is meant by ‘business’ (as distinct
from personal) liabilities and by a company ‘taking over’ a debt. Instead of ‘novating’ a loan to the individual proprietors in the name of the company, current banking practice is said normally to be to advance a new loan to the company, which is used to repay the existing debt. This might be of particular relevance to the mortgage debt of a property business being assumed by a company. As of August 2025, updating of the guidance at CG65745 was still under consideration, but HMRC has indicated that there is no intention to withdraw ESC D32.

Practical tip

Given the apparent uncertainties identified by the CIOT, pending updated guidance from HMRC, there may be circumstances where an application under the non-statutory clearance procedure will be advisable, asking for agreement that the company will be regarded as having taken over the business liabilities.

Disclaimer: The information provided on AccountingFirms.co.uk is for general informational purposes only and should not be considered professional accounting, tax, or legal advice. Always consult a qualified accountant or tax adviser for advice tailored to your individual circumstances.