Last updated: 14 October 2026
What happens to capital allowances when a partnership incorporates?
When a partnership transfers its business to a new company, the partnership has ceased trading and the plant and machinery are treated as sold at market value. That can create a balancing charge for the partners. To avoid this, the partnership and the company can make a joint election, because they’re connected, to transfer assets at their tax written-down value. The company then carries on claiming allowances as if nothing had changed, but it can’t claim the Annual Investment Allowance or full expensing on assets it took over.
Without and with an election
| Point | No election | Connected persons election |
| Transfer value | Market value | Tax written-down value |
| Partners’ final period | Balancing charge or allowance | No balancing adjustment |
| Company’s starting pool | Market value | Written-down value |
| AIA or full expensing on transferred assets | No | No |
Making the election
- It’s available because the partners control the new company, making them connected
- It must be made within 2 years of the transfer
- Both the partnership and the company sign the election and send it to HMRC
- It applies to all plant and machinery transferred, not individual assets
Example
Greene & Patel, a partnership of two plumbers, incorporates on 1 July 2026. Its vans and tools have a tax written-down value of £18,000 but a market value of £32,000. Without an election, the partners would have a £14,000 balancing charge, taxed as profit in their final period. With an election, the vans pass at £18,000, and the company claims writing down allowances on that figure from its first year.
Common problems
- Missing the 2-year deadline for the election
- Assuming the company can claim AIA on assets it took over from the partnership
- Forgetting cars, which go into the company’s pools at written-down value too
- Not recording assets transferred in the company’s fixed asset register
Other incorporation reliefs
- Incorporation relief (CGT): gains on goodwill and property can be deferred if all business assets (except cash) are transferred for shares
- SDLT: property transfers to a company are usually subject to SDLT at market value, though some partnerships can benefit from special rules
- VAT: a transfer of a going concern means no VAT on the transfer
The partners’ final tax returns
The partnership’s last accounts run to the date of incorporation. Any overlap relief left over from before the 2024/25 basis period reform is used in the final year.
Records to keep
Keep a list of every asset transferred, its original cost, its tax written-down value and its market value at the date of incorporation, together with a signed copy of the election. The company will need these figures for years, and HMRC may ask to see the election if it checks either the partnership or the company return.
Frequently asked questions
Can a sole trader use the same election?
Yes, if they control the company.
Does the election cover buildings?
No, only plant and machinery; structures and buildings allowance has its own rules.
Can the company claim the 100% first-year allowance on a car it took over?
No.
What if assets aren’t transferred?
Then the partners are treated as selling them at market value.
Related: CGT relief on incorporating a business, SDLT on transfers to limited companies and whether to incorporate.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with incorporation and capital allowances. See our small business accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
