Individuals have a number of reliefs from Capital Gains Tax. Some of the reliefs include Roll-Over relief, Incorporation Relief, Gift Relief and Entrepreneurs relief. The different reliefs have different conditions that need to be met attached to them so you will need to look at these first in order to determine if you are entitled to any of the above mentioned reliefs. The different reliefs also have different implications to your liability and a brief description of each of the reliefs is given below:
- Roll Over Relief – defers tax on chargeable gains when a person disposes of a qualifying business asset and buys another.
- Incorporation Relief – Applies when an individual transfers their business as a going concern to a company. Like rollover relief, the aim is to defer CGT arising.
- Gift relief – A wide ranging relief will allows claimants to defer any capital gains tax due.
- Entrepreneurs Relief – is a relief that is open to directors who own 5pc or more of a company, and which allows them to enjoy a 10pc tax rate on capital gains up to a lifetime limit. This compares with the 28pc rate of tax payable without the relief.
In this article, we look at Incorporation relief. If you need more information on the other reliefs mentioned, click on the relevant links.
Incorporation Relief – What is it?
Incorporation relief applies when a person who is not a company (including partnerships, trustees and personal representatives) transfers their business as a going concern to a company. The aim of this relief is to defer any capital gains tax.
The idea is that if they receive shares in the business in return, they’re unlikely to accept it given no cash has changed hands but they’re faced with a large CG bill.
Incorporation Relief – How it works
In order to claim incorporation relief, a number of conditions need to be met. The conditions are that a person (not a company) has
- transferred a business to a company
- as a going concern (business must have been active and operating at the time of transfer and there is nothing that will prevent the transferee company from carrying on that business).
- with all its assets or all its assets excluding cash
- for a consideration which must be wholly or partly shares issued by the transferee company to the transferor
If all the above conditions are met, incorporation relief is mandatory in the sense that is applies automatically, thus you do not have to claim it. If you don’t want this relief, you will have to make an election under s162a TCGA1992.
How Incorporation Relief is calculated
The calculation for incorporation relief can be done in a number of steps:
Step 1: Add up the total consideration, this is the market value of shares and any cash received
Step 2: Calculate any Capital Gains you have on chargeable assets such as property and goodwill.
Step3: Work out the gain not chargeable to Capital Gains Tax:
Gains not chargeable to CGT = Gains (Step 2) * Market value of shares / Market value of shares + Cash
The gains not chargeable are essentially rolled over.
Step 4: Work out the deemed cost of new shares
Cost of shares only – gain not rolled over (step 3 ) = deemed cost of new shares.
With incorporation relief, you are essentially deferring any capital gains tax due on the sale of chargeable assets such as property and goodwill and consequently reducing the acquisition cost of shares you have received for the sale of your company. Thus, you will only incur the capital gains tax once you sell the shares.