An area due to come up in the June 2023 Advanced Tax is incorporation relief.

 As an unincorporated sole trader business grows, the small business owner may decide to transfer the business to a limited company in order to make finance more accessible or to prepare an exit route.

Incorporation relief defers the capital gain when a sole trader transfers the business to a limited company.

Gains will only arise on chargeable assets such as land and buildings and goodwill.

Assets such as cars, chattels worth less than £6,000 and current assets (inventory, receivables, and cash) are exempt from CGT and will not create gains.

Unlike other CGT reliefs, incorporation relief automatically applies if 3 conditions are satisfied.

·       Transfer as a going concern

·       All assets transferred except cash

·       Consideration wholly or partly in shares.

Incorporation relief works in a similar way to rollover and gift relief. The gain arising is rolled over against the value of the shares to give base cost.

As a result, the gain is postponed until the shares in the company are sold.

If partial consideration for the company is in the form of cash, the gain relating to the cash element crystallises immediately on incorporation.

The benefit of taking consideration in cash, is that this offers the sole trader the opportunity to use up the annual exemption of £12,300, capital losses and utilise part of the £1 million business asset disposal relief lifetime allowance.

It is possible to make an election to disapply incorporation relief in order to crystallise a gain immediately to claim more business asset disposal relief.

It is important to note that business asset disposal relief is not available on goodwill transferred to a close company where the sole trader owns at least 5% OSC going forward as the shares will also be eligible for the relief when sold later.

If you are planning on doing Advanced Tax in June 2023, I recommend you purchase Advanced Tax Condensed which will allow you to learn the technical rules at lightning speed. 

 You can purchase it using the link below:

#taxtips #neildacosta #kaplan #accaglobal #icaewinsights #ctastudents