When a sole trader or partnership transfers a business to a company, a chargeable gain may arise. This is calculated by reference to the market value of the business assets at the date of incorporation (including goodwill), compared with their original base cost. The resulting gain would ordinarily be subject to Capital Gains Tax.

In many cases, however, the transfer is structured to qualify for Incorporation Relief. Broadly, this requires that the whole business is transferred as a going concern, together with all of its assets (other than cash), in exchange wholly or partly for shares issued by the company.

Where the conditions are satisfied, Incorporation Relief applies automatically and no formal claim is required. The effect of the relief is to defer the gain by reducing the base cost of the shares received, thereby postponing the tax charge until those shares are subsequently disposed of.

A taxpayer may elect for the relief not to apply. This election must be made in writing by 31 January, two years after the end of the tax year in which the incorporation takes place. For example, for a transfer in the current 2026–27 tax year, the election deadline is 31 January 2030. This deadline is reduced by one year if the shares are disposed of in the tax year following that of incorporation.