Incorporation Relief: Moving from Sole Trader to Limited Company
What incorporation relief actually does to the Capital Gains Tax bill, and how a VAT-registered sole trader moves the business — and the VAT registration — into a company cleanly.
Published 17 August 2026
Plenty of sole traders reach the point where a limited company makes more sense — better tax planning, limited liability, a stronger look to customers and lenders. The worry that stops people is Capital Gains Tax: transferring a business you have built up counts as a disposal at market value, and the goodwill alone can be worth six figures.
That is where incorporation relief (section 162, Taxation of Chargeable Gains Act 1992) comes in. It is worth being precise about what it does, because the common shorthand — "there is no CGT to pay" — is not quite right.
The one thing to get straight
Incorporation relief defers the gain; it does not cancel it. There is normally no CGT to pay in the year you incorporate, which is why it feels tax-free. But the whole gain is deducted from the base cost of your new shares, so it comes back into charge when you eventually sell the company, wind it up, or otherwise dispose of those shares. Treat it as a deferral you will one day settle, not as a gain that disappears.
1. Check the business genuinely qualifies
Incorporation relief applies to a business transferred as a going concern with all of its assets (cash aside), in exchange wholly or partly for shares. It is a business test, not an asset test — a straightforward property letting activity usually does not count as a 'business' for these purposes unless it is run on a genuinely commercial, time-intensive basis. If in doubt, take advice before anything moves.
2. Value the assets being transferred
You need an honest market value for goodwill, plant and equipment, vehicles, stock and any property. The gain is calculated as if you sold the business at market value to a third party, so the valuation drives the numbers on both the CGT computation and the company's opening balance sheet. Keep the workings — HMRC can and does challenge goodwill values on incorporation.
3. Understand what the relief actually does
The net gain is deducted from the base cost of the shares issued to you. Example: a business worth £300,000 with a £250,000 gain gives you shares nominally worth £300,000 but with a CGT base cost of just £50,000. Nothing is payable now; the £250,000 is taxed later when the shares are sold. Current CGT rates are 18% (basic rate band) and 24% (higher/additional), with a £3,000 annual exempt amount.
4. Consider whether to disapply the relief
Since 6 April 2026 Business Asset Disposal Relief is charged at 18% (it was 14% for 2025/26 and 10% before that), on a lifetime limit of £1m. Deferring a gain into shares can mean paying more later, so in some cases it is better to elect out under s162A, pay tax now at BADR rates and give the shares a full market-value base cost. This is a genuine calculation, not a rule of thumb.
5. Get the VAT position right — TOGC
The transfer of the trade and assets to your new company should be treated as a transfer of a going concern, which is outside the scope of VAT — no VAT is charged on the transfer itself. The conditions in VAT Notice 700/9 must all be met: the company must be VAT registered or become liable to register, must carry on the same kind of business, and there must be no significant break in trading.
6. Decide whether to keep the VAT number (VAT68)
You can move the existing VAT number across to the company by submitting form VAT68 together with the company's VAT registration application. Keeping the number is tidy for customers and suppliers, but the company inherits the VAT history, including any past errors or liabilities. Registering the company for a new number and deregistering the sole trade is often cleaner. Either way, tell your bookkeeping software, your bank direct debit and your Making Tax Digital software about the change — the VAT direct debit does not carry over automatically.
7. Deal with property and SDLT separately
Land and buildings transferred to a connected company are charged to SDLT on market value regardless of what the company pays. Incorporation relief does not help here. Many owners leave the property personally owned and grant the company a licence or lease, but that also has consequences for future BADR and inheritance tax reliefs, so model it before you decide.
8. Do the administrative switchover properly
Incorporate the company, open a company bank account, transfer the trade on a clean date, register the company for corporation tax and PAYE if needed, novate contracts and insurance, apply for any licences in the company's name, tell your customers, and cease the sole trade correctly on your final Self Assessment return. Overlap between the two entities is where problems start.
9. Watch the traps
Goodwill amortisation is generally not deductible for corporation tax where goodwill is acquired from a related party on incorporation, and BADR is restricted on goodwill sold to a related close company. Capital allowances need a succession election where relevant. And any balance left owing to you personally becomes a director's loan account — useful, but it has to be documented and tracked.
A worked example
A VAT-registered sole trader with turnover of £280,000 incorporates. The business is valued at £300,000 — goodwill £270,000, equipment £25,000, stock £5,000. The original cost of those assets for CGT purposes is £50,000.
Everything is transferred to the new company as a going concern in exchange for 100 ordinary shares. The gain of £250,000 is fully deferred: nothing is payable for 2026/27, and the CGT base cost of the shares becomes £300,000 − £250,000 = £50,000.
Five years later the company is sold for £600,000. The chargeable gain is £550,000, not £300,000 — the deferred £250,000 has come back. If Business Asset Disposal Relief applies at 18% on the first £1m of qualifying gains, that is roughly £99,000 of tax; without it, £132,000 at 24%.
On the VAT side, no VAT is charged on the £300,000 transfer because it qualifies as a TOGC, and the existing VAT number is moved to the company on form VAT68 so customers and direct debits for suppliers see no change.
The alternative: holdover relief
Incorporation relief is all-or-nothing on the whole business. If you want to leave assets out — a property, for example — gift holdover relief on business assets (s165 TCGA 1992) can be claimed instead on the assets you do transfer. It has to be claimed jointly with the company, and it reduces the company's base cost rather than yours. Which route is better depends on what you own, what you want to keep personally, and what you expect to do with the company in the long run.
Thinking about incorporating?
We handle the whole switchover for sole traders across Brentwood and Essex — valuation and CGT computation, the incorporation itself, the TOGC and VAT68 paperwork, corporation tax and PAYE registration, and your final sole trader Self Assessment. One clean transfer date, no gaps.
Correct as at 17 August 2026. General guidance only, based on the rules in force for 2026/27 — incorporation is highly fact-specific, so please take advice on your own position before transferring anything.
Free: 2026/27 Tax Deadline Calendar
Every key HMRC date for the tax year — self-assessment, corporation tax, VAT, payroll, and more. Sent straight to your inbox as a PDF.
No spam. Unsubscribe anytime.
Related Articles
Common Questions
Is there really no Capital Gains Tax to pay when I incorporate?
This is the most common misunderstanding. Incorporation relief does not wipe the gain out — it defers it. The gain on the business assets is rolled into the base cost of the shares you receive, so there is normally nothing to pay in the year you incorporate, but the gain resurfaces when you eventually sell or wind up the company. It is a postponement, not an exemption.
Do I have to claim incorporation relief?
No — relief under s162 TCGA 1992 is automatic if the conditions are met. You can elect to disapply it under s162A, which is sometimes worthwhile if you want to crystallise a gain now while Business Asset Disposal Relief is available. The election must generally be made by the second 31 January after the end of the tax year of incorporation (shortened to one year if you dispose of the shares in the following tax year).
What are the conditions for incorporation relief?
All three must be met: (1) you transfer the business as a going concern, (2) you transfer all of the assets of the business — cash may be left out — and (3) the consideration is wholly or partly shares in the company. If only part of the consideration is shares, only a proportion of the gain is deferred; the rest is chargeable now.
Can I keep my VAT number when I incorporate?
Yes. Because you are changing legal entity, you can apply to transfer the existing VAT registration number to the company using form VAT68 alongside a VAT registration application for the new company. Alternatively you deregister the sole trade and register the company separately with a fresh number. Transferring the number also transfers the VAT history and liabilities, so it is a decision worth thinking about, not a default.
Do I charge VAT on the assets I transfer to my own company?
Normally no. The transfer of a business as a going concern (TOGC) is outside the scope of VAT provided the company is VAT registered (or becomes liable to register as a result), carries on the same kind of business and there is no significant break in trading. VAT Notice 700/9 sets out the conditions. Get the TOGC treatment wrong and HMRC can assess VAT on the whole asset transfer.
What about Stamp Duty Land Tax on a property I transfer?
Incorporation relief only covers Capital Gains Tax. If business premises move into the company, SDLT is charged on the market value because you and the company are connected — even if no money changes hands. That single cost is often the reason a property is kept outside the company and licensed to it instead.