What is Incorporation Relief?
When an individual transfers their UNINCORPORATED BUSINESS (either a sole trader or a partnership) to a COMPANY, the individual assets are deemed to have been disposed of at MARKET VALUE.
Incorporation Relief allows the gains arising on incorporation to be deferred until the shares the company are sold.
Conditions for Incorporation Relief
INCORPORATION RELIEF is AUTOMATIC if all of the following conditions apply:
- The unincorporated business must transfer as a GOING CONCERN
- ALL of the assets (EXCEPT CASH) must be transferred to the company.
- Consideration received must be WHOLLY OR PARTLY in the form of shares in the company.
How the relief works
If ALL of the consideration is in the form of SHARES then ALL of the gains can be deferred.
If PART of the consideration is in SHARES, then the INCORPORATION RELIEF is calculated as:
TOTAL GAINS x (MV OF SHARE CONSIDERATION / MV OF TOTAL CONSIDERATION)
The gain that becomes chargeable is calculated as:
TOTAL GAINS x (MV OF NON SHARE CONSIDERATION / MV OF TOTAL CONSIDERATION)