Taxation (UK) · The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the disposal of capital assets

Incorporation Relief and Share Reorganisations for ACCA Taxation (UK)

Updated 11 October 2026 · Fact-checked

Incorporation relief defers the gain when you transfer a business as a going concern, with all its assets, to a company wholly or partly for shares. The gain is deducted from the shares' base cost. Bonus issues, rights issues and reorganisations are matched to the original holding, so no gain arises at the time.

Understand Incorporation Relief and Share Reorganisations

When a sole trader or partnership transfers a business to a company, the transfer is a disposal at market value. The company is connected with the owner, so market value is used whatever is actually paid. Without relief, the gains on assets such as goodwill and property would be taxed at once, even if the owner only receives shares and no cash.

Incorporation relief (section 162 TCGA 1992) solves this. It applies automatically if three conditions are met: the business is transferred as a going concern, all assets of the business (other than cash) are transferred, and the consideration is wholly or partly in shares. The gain is not taxed now. Instead it is rolled into the shares by deducting it from their base cost, so it is taxed when the shares are sold.

If you receive shares and other consideration, such as cash or a loan account, only part of the gain is deferred. The deferred part is: total gain × (value of shares ÷ total consideration). The rest of the gain is taxable now. If all the consideration is shares, the whole gain is deferred.

The relief is automatic, but you can elect to disapply it. You would do this to use the annual exempt amount, capital losses, or to claim business asset disposal relief (BADR) on the gain now, if the BADR conditions are met. BADR taxes qualifying gains at 14%, within the £1,000,000 lifetime limit. BADR is not available on the gain deferred at incorporation. If you do not elect, the deferred gain is taxed on the later share sale, usually at 18% or 24% unless BADR or another relief applies to that disposal. A later share disposal can still qualify for BADR if its own conditions are met, but the gain rolled into the base cost is taxed at the rate then applying. The election must be made by the second anniversary of 31 January following the end of the tax year of the transfer (for a transfer in 2025-26, by 31 January 2029).

Share reorganisations work on a similar idea. A bonus issue gives free shares, and a rights issue is a purchase of new shares in proportion to your holding. Neither is a disposal. The new shares are treated as acquired when the original shares were. A bonus issue adds shares at no cost. A rights issue adds shares and the cost paid. Both are added to the share pool, so the pool just grows.

Key rules to remember

Conditions for incorporation relief: Going concern + all business assets (excluding cash) + shares as consideration (wholly or partly); If all three are met, the relief applies automatically. It is not a claim.
Gain deferred (part-share consideration): Deferred gain = Total gain × Value of shares ÷ Total consideration; If the whole consideration is shares, the entire gain is deferred.
Gain taxable now: Gain taxable now = Total gain − Deferred gain; This is taxed in the year of transfer, at 18% or 24% depending on the available basic rate band, less the annual exempt amount of £3,000.
Base cost of shares after relief: Base cost = Market value of shares received − Deferred gain; This is the figure used when the shares are later sold.
Bonus issue: New pool shares = original shares × bonus ratio; cost added = nil; No disposal. Number of shares increases but total cost stays the same.
Rights issue: Pool cost increases by the amount paid for the new shares; number of shares increases; No disposal. The new shares are added to the pool, with the cost paid.
BADR rate and limit: 14% on qualifying gains up to a £1,000,000 lifetime limit; Can apply to the gain at incorporation only if you elect to disapply the relief and the BADR conditions are met. It is not available on a gain that is deferred.

How to solve Incorporation Relief and Share Reorganisations questions

Use this method for any question on incorporating a business or on a share reorganisation.

1Identify the event: transfer of a business to a company, or a bonus, rights or other reorganisation of existing shares.
2For incorporation, check the three conditions: going concern, all assets other than cash transferred, and shares given as consideration.
3Compute the total gain on each asset at market value. Add them together. Gains on goodwill, property and other chargeable assets all count.
4Split the consideration. If it is all shares, defer all the gain. If it is mixed, defer gain × shares ÷ total consideration.
5Compute the base cost of the shares: market value of shares less the deferred gain.
6Deal with the taxable part. Deduct the annual exempt amount and any losses, then apply 18% or 24% by reference to the remaining basic rate band. Consider whether to disapply the relief to use BADR at 14%.
7For bonus or rights issues, add the new shares to the existing pool: nil cost for a bonus issue, cost paid for a rights issue. Do not compute a gain at the time of the issue.
8State the answer clearly, with the deferred gain, taxable gain and new base cost shown separately.

Quickest way: Fraction method for mixed consideration

When to use it: Use this when a question gives shares plus cash or a loan account and you only need the gain deferred and the taxable gain.

Write total gain and total consideration.
Write the fraction: shares ÷ total consideration.
Multiply the gain by the fraction to get the deferred gain.
Subtract from total gain to get the taxable gain now.
Base cost of shares = value of shares − deferred gain.
For share issues, just add shares to the pool, with nil cost for a bonus and the amount paid for a rights issue.

Common mistakes in Incorporation Relief and Share Reorganisations

Treating incorporation relief as a claim that must be made.
Many other CGT reliefs, such as gift holdover relief, need a claim, so students assume this one does too.
Fix: Remember the relief is automatic if the conditions are met. Only the election to disapply it needs to be made.
Deferring all the gain when cash or a loan account is also received.
Students see that shares are given and forget that other consideration reduces the relief.
Fix: Use the fraction shares ÷ total consideration. The part of the gain matching the non-share consideration is taxed now.
Using the price paid rather than market value for the assets transferred.
Students forget the company is connected with the owner.
Fix: Always use market value for transfers to a connected company.
Leaving out assets or ignoring the 'all assets' condition.
Students focus on the shares and overlook what is retained, such as a property kept outside the company.
Fix: Check the facts. If an asset other than cash is kept back, the relief conditions are not met.
Computing a gain on a bonus or rights issue.
Students think any receipt of shares is a disposal.
Fix: Remember a bonus or rights issue is not a disposal. Add the shares to the pool, with nil cost for a bonus issue and the cost paid for a rights issue.
Forgetting to reduce the base cost of the shares by the deferred gain.
Students stop after finding the deferred amount.
Fix: Always finish with market value of shares minus deferred gain, as it affects the future gain.

Worked examples

Example 1

Anita transfers her sole trade to a new company, Anita Ltd, in July 2025, as a going concern with all assets except cash. The only chargeable assets are goodwill (market value £150,000, cost nil) and a shop (market value £250,000, cost £100,000). She receives shares in Anita Ltd worth £400,000. Compute the gain deferred, the gain taxable now, and the base cost of her shares.

Show the solution

Check conditions: going concern, all assets transferred and shares received, so incorporation relief applies automatically.
Goodwill gain = £150,000 − nil = £150,000.
Shop gain = £250,000 − £100,000 = £150,000.
Total gain = £150,000 + £150,000 = £300,000.
All consideration is shares, so the whole gain is deferred.
Gain taxable now = nil.
Base cost of shares = £400,000 − £300,000 = £100,000.

Answer: Gain deferred £300,000; gain taxable now nil; base cost of the shares £100,000.

Example 2

Ben transfers his business to Ben Ltd as a going concern with all assets. The total chargeable gain is £120,000. He receives shares worth £90,000 and £30,000 in cash. Compute the gain deferred, the gain taxable now, and the base cost of the shares. Then calculate his shareholding after a later 1 for 2 bonus issue if he holds 90,000 shares.

Show the solution

Total consideration = £90,000 + £30,000 = £120,000.
Deferred gain = £120,000 × £90,000 ÷ £120,000 = £90,000.
Gain taxable now = £120,000 − £90,000 = £30,000.
Base cost of shares = £90,000 − £90,000 = nil.
Bonus issue 1 for 2 on 90,000 shares gives 90,000 × 1/2 = 45,000 new shares.
The bonus is not a disposal. Total shares = 90,000 + 45,000 = 135,000, with total cost still nil.

Answer: Gain deferred £90,000; gain taxable now £30,000 (before the annual exempt amount of £3,000 and any losses); base cost of shares nil. After the bonus issue he holds 135,000 shares with no gain arising.

Exam tips

Look for the three conditions in the scenario. If one fails, say that incorporation relief is not available.
Always show the market value of the assets transferred, since the connected person rule applies.
In a mixed consideration question, set out the fraction clearly. Markers give credit for method even if figures slip.
If the question mentions BADR or unused annual exempt amount, discuss disapplying the relief and compare the tax cost now with the later tax cost.
For bonus and rights issues, set out the share pool in a short table-like list of number of shares and cost, and state clearly that no disposal arises.

Practice questions from The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the disposal of capital assets

Incorporation Relief and Share Reorganisations in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Strategic ProfessionalIncorporation Relief and Share Reorganisations

Incorporation Relief and Share Reorganisations: frequently asked questions

Is incorporation relief automatic?

Yes. If the business is transferred as a going concern with all its assets, and shares are part of the consideration, the relief applies automatically. You only need to act if you want to disapply it by election.

Why would you disapply incorporation relief?

You might do this to use the annual exempt amount or capital losses, or to claim business asset disposal relief now, so that the gain is taxed at 14% if the conditions are met. Otherwise the gain is deferred and taxed on the later sale of the shares, usually at 18% or 24% unless BADR or another relief applies to that disposal. BADR is not available on the deferred gain itself.

Is a bonus or rights issue a disposal for CGT?

No. The new shares are added to the existing holding, as if acquired when the original shares were. A bonus issue adds shares with no cost, while a rights issue adds shares and the cost paid for them.

What happens if I take cash as well as shares on incorporation?

Only part of the gain is deferred. You defer the gain × shares ÷ total consideration. The rest is taxed in the year of transfer, after the annual exempt amount of £3,000 and any losses.