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What is Incorporation Relief
- aafra9
- Aug 22
- 3 min read
What is Incorporation Relief
Incorporation Relief falls under Section 162 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992). It enables individuals or partnerships who transfer their business (excluding cash) into a company in exchange for shares to defer Capital Gains Tax (CGT). Instead of paying CGT when transferring business assets, the gain is “rolled over” into the company shares and only arises when the shares are sold.
How the Incorporation Relief Defers Capital Gain Tax (CGT)
When you transfer the business and all its assets except cash in exchange for shares, the gain is not taxed immediately. Instead, the base cost of the received shares is reduced by the amount of gain deferred. This means CGT is postponed until you dispose of those shares. If you never sell, the tax liability can potentially be deferred indefinitely.
Example (simplified):
Business transferred and valued at £100,000
Gain without relief: £60,000
Shares received valued at £100,000
After deferring the £60,000 gain, the base cost for CGT calculation becomes £40,000
(£100,000 – £60,000 = £40,000)
Who Qualifies for Incorporation Relief
To qualify for Incorporation Relief, you must:
Be a sole trader or in a partnership,
Transfer the entire business—including assets, but excluding cash—in exchange for shares in the company.
But there’s an important caveat for buy-to-let landlords: you must show that you’re operating a genuine property business, not just passively holding assets. HMRC expects active management like maintenance, tenant handling, and other regular landlord duties.
A landmark tribunal case (Ramsey v HMRC [2013] UKUT 0226) confirmed that property letting can be treated as a business when the landlord’s activity exceeds what a passive investor would do e.g. working approximately 20 hours per week managing, maintaining, and supporting tenants. (For more details click here)
Summary Table
Aspect | Detail |
Legal Basis | Section 162, TCGA 1992 |
What It Does | Defers CGT on transfer of business assets into shares |
Mechanism | Base cost of shares reduced by deferred gain |
Qualification | Must be sole trader/partnership; transfer business in exchange for shares; genuine business activity required |
FAQs on Incorporation Relief for UK Landlords
Q1. Do all landlords qualify for Incorporation Relief?
Not necessarily. You must demonstrate that your rental activity is a business, not just a passive investment. HMRC expects evidence of regular management—like tenant handling, property maintenance, and business-like operations.
Q2. Can I claim Incorporation Relief if I transfer just one property?
Usually, no. Relief applies when you transfer an entire business. If you only transfer a single property that does not amount to a full business, you’re unlikely to qualify.
Q3. What happens to the Capital Gains Tax if I claim Incorporation Relief?
The CGT is not cancelled but deferred. The gain is rolled over into the base cost of the new company shares. You only pay CGT when you eventually sell or dispose of those shares.
Q4. Can Incorporation Relief be combined with other tax reliefs?
Yes, in some cases. For example, if the conditions for Business Asset Disposal Relief (BADR) or Holdover Relief are met, they may interact with Incorporation Relief. Professional advice is essential here.
Q5. What evidence should landlords keep to prove they run a business?
Keep records of tenant communications, hours spent on management, maintenance schedules, invoices for repairs, and any services provided. This help demonstrate that your property letting is an active business, not a passive investment.
Tax bills can eat into your rental profits – but with Incorporation Relief, you could save thousands. PKPI Chartered Accountants helps landlords like you every day to restructure tax-efficiently.
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