CGT relief on incorporation
There are still strong commercial reasons for incorporating a business, such as securing limited liability. A company can smooth an income stream over a number of tax years, thus reducing any spikes into high tax bands, and pay pension contributions in a tax-efficient manner.
Where an established business has built up significant goodwill, or holds valuable property, taxable gains will arise on incorporation of that business. Those gains are taxed at 20%, or at 28% where residential property is transferred to the company. You may be happy to pay CGT at 20%, and allow the company to pay you the balance of the sale price over a number of years with no further tax to pay.
If your business is trading rather than property-based, entrepreneurs’ relief can apply to some or all of the gains on incorporation, in which case the tax on gains is payable at 10%.
Entrepreneurs’ relief can be claimed when goodwill is transferred to a company, as long as the vendor of the business ends up holding no more than 5% of the new company’s shares. Any shares held by individuals connected with the vendor are ignored, which allows the business to be incorporated as part of a family succession plan.
Where your trading business is incorporated as part of an arrangement to sell the new company to a third party, entrepreneurs’ relief can generally be claimed on all the gains. The new company must be sold within 28 days of the incorporation.
If you have incorporated your soletrader business or partnership since 3 December 2014, we should review the tax payable on any gains as the tax rules have been changed retrospectively back to that date.