What is incorporation relief when transferring a business to a company?

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I now have sufficient information to provide a comprehensive answer. Here is the full explanation:

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## Incorporation Relief (TCGA 1992, s.162)

### What the law says

**The statutory provision** is found in **TCGA 1992, s.162**. It applies where:

1. **A person who is not a company** transfers to a company a business **as a going concern**;
2. The transfer is of the **whole assets of the business** (or the whole of those assets **other than cash**); and
3. The business is transferred **wholly or partly in exchange for shares** issued by the company to the transferor (referred to in the legislation as "the new assets").

**How the relief is calculated:** The gain rolled over is the fraction **A/B** of the total chargeable gain on the old assets, where:
- **A** = the cost of the new assets (the shares received), and
- **B** = the value of the **whole** consideration received by the transferor in exchange for the business.

This amount is deducted from the aggregate chargeable gains on the old assets and is apportioned across the new shares, reducing their base cost accordingly. The rolled-over amount cannot exceed the cost of the new assets.

**Practical effect:** If the entire consideration is in shares (A = B), the full gain is rolled over. If part of the consideration is non-share (e.g. cash or loan account credit), only a proportionate part of the gain is deferred; the remainder is immediately chargeable.

**Election to disapply:** Under **TCGA 1992, s.162A**, the transferor may elect for s.162 **not** to apply. The election must be made by notice to HMRC no later than the second anniversary of the 31 January following the tax year in which the transfer took place (or the first anniversary if all new assets have been disposed of by the end of the following tax year). Where the business was jointly owned, each owner has a separate entitlement to make (or not make) the election.

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### HMRC guidance / practice

**Automatic relief — no claim needed:** HMRC confirms that incorporation relief is **automatic** — no claim is required. The person transferring the business can, however, make an election under s.162A to prevent the relief from applying (e.g. where they wish to crystallise gains to use the annual exempt amount or capital losses).

**Conditions summarised by HMRC (CG65710):**
- The business must be transferred **as a going concern**;
- The **whole** of the assets of the business (or whole assets other than cash) must be transferred;
- The consideration must be satisfied **wholly or partly by an issue of shares** in the company to the transferor.

**How the deferral works in practice:** All or part of the gains arising on the disposal of the business assets are "rolled over" against the cost of the shares. The CGT charge is **postponed** until the transferor disposes of the shares.

**Partnerships:** The relief is also available to **individual partners** where the whole of a partnership business is transferred to a company as a going concern in exchange for shares. The relief is computed **separately for each partner**, even if one or more other partners is a company.

**Offshore fund exception:** Where one or more assets in the transfer is an interest in an **offshore fund**, the gain on that asset is not deferred under s.162 but is immediately charged as an offshore income gain.

> **Key practical point:** Because the relief is automatic, advisers must actively consider whether to elect out under s.162A — for example, where the transferor has unused annual exempt amounts, capital losses, or where Business Asset Disposal Relief (at 10%) would be preferable to a future gain on the shares taxed at a higher rate.

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