Incorporation relief is a tax relief that defers the chargeable gain of business assets from an incorporate business in the event of transfer into a new or existing business (despite that nothing is received in return) as long as it is transferred as a going concern business. This chargeable gain sometimes arises on some specific type of assets such as land and buildings because the market value of such assets usually exceeds the original cost of acquisition at the point of transfer.
One of the requirements of the relief is “all or nothing” claim such as all business assets without any exclusions must be transferred to the transferee company. In addition, one must be able to identify that the current unincorporated business as a proper “business”. For instance, the activities of collecting rents, advertising for and vetting tenants, repairing and decorating will constitute a proper business for a property letting business while delegating such activities to a third-party letting agent will not.
Although most people always assume that not paying capital gain tax on the gain of these business assets is a good bargain without realising that the gain will be subsequently deducted from the base cost of shares of the transferee company which might result in higher tax at the time that shares are sold due to number of reasons. Changes in tax legislation, changes in tax rates and appreciation of share values are some of the factors that could contribute to this higher tax which can make the use of this relief a disadvantage.
If you have unincorporated business and thinking of transferring the business into a proper limited company especially when the business has some assets which can result to chargeable gain at the point of transfer, we can help with this transfer and assess whether if it will be advantage if you disapply the incorporation relief as it is given automatically by HMRC as long as the requirements are met following Section 162 Taxation of Chargeable Gains Act 1992.
Should you need assistance checking whether incorporation relief should apply for your company, kindly get in touch without any delay.