Where an individual, partners or trustees transfer a business into a company in exchange for the company issuing them with shares, then (subject to a number of conditions being met) the inherent gain on the disposal of the business can be rolled into the shares issued by the company – effectively, the gain is deferred until the shares are sold. This is known as incorporation relief.

This relief applies to the transfer of a business, which is much wider than the definition of a trade, and can include a property business – although whether holding properties is a property business is a question of fact, and generally turns on the degree of activity.

However, this relief is not always desired – although it is not possible to make a claim for business asset disposal relief on the sale of a trading business to a connected company, it may still be beneficial to sell a business to a company and pay capital gains tax at 24%, leaving the proceeds on loan account to be drawn down in the future without any further tax liabilities.

Where the conditions are met, the relief applies automatically, however, it is possible to elect out of them at this stage.

Changes were announced at the Budget which will take effect from 6 April 20026, and are twofold:

• Any claim for incorporation relief will need to be made in the taxpayer’s self-assessment tax return in the year the incorporation took place, with particular details of the transaction (including the type of business transferred) being disclosed. This seems to be targeted at the incorporation of property businesses, to allow cases to be identified to review and determine if a ‘business’ actually exists; and

• Removal of the ability to elect out of the incorporation relief provisions – this option will simply be removed, which is presumably aimed at cases where the desire is to be taxed on the market value of the business and leave the consideration outstanding on loan account. It will still be possible to structure the incorporation to ‘fail’ the conditions (simply by not transferring all of the required assets to the company) but it would seem that these transactions will be under much greater scrutiny.

Given the change to the taxation of property income then we are likely to see more property businesses incorporated, and therefore more cases under the microscope.

If you would like to discuss this in further detail, please get in touch with your usual contact or e-mail us at experts@tacs.co.uk.