Q: I am thinking that I may incorporate my business by transferring it for shares. I am trying to understand how it works, the relief and also what I need to pay in Capital Gains Tax. Can you help?
A: Incorporation means legally setting up your business as a limited company, making it a separate legal entity from you as an individual. This means the company can own assets, enter into contracts, and be held responsible for its own debts.
The steps towards incorporation include choosing a company name, appointing at least one director, deciding on shareholders and how many shares they’ll own, and preparing basic documents like the Articles of Association. And you need to register with Companies House.
Incorporating your business can allow you to claim Incorporation Relief, which lets you defer paying Capital Gains Tax when you transfer your business to a company in exchange for shares. This means you won’t have to pay tax on any gain until you sell those shares in the future.
Let’s imagine you go ahead and incorporate your business and you receive 1,000 £1 ordinary shares. Your company has a value of £100,000 on incorporation, and the shares had a market value of £100 each.
The net assets transferred, excluding goodwill, total £40,000.
If you didn’t get Incorporation Relief, it would mean the ‘chargeable gain’, as it’s called, would be £60,000.
Normally, the cost of shares in a future disposal/ sale would be £100,000. But with the relief available, this gets reduced by the amount of the deferred gain (£60,000), leaving a base cost of £40,000, or £40 per share.
This is a complex area of tax and we’d need to know all the key details of your business to be able to determine the impact for you and how much Capital Gains Tax you might be liable for. If you’d like to discuss your circumstances in full with our team, please do get in touch.
