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Advanced Taxation (UK) · Alternative ways of achieving personal or business outcomes and their tax consequences

Incorporation Relief, Gift Relief and Business Asset Disposal Relief

Updated 11 October 2026 · Fact-checked

Incorporation relief (s162) defers the gain when you transfer a business to a company for shares. Gift relief (s165) defers the gain on a gift of qualifying business assets. Business asset disposal relief (BADR) cuts the tax rate to 14% on qualifying gains, up to a £1,000,000 lifetime limit.

Understand Incorporation Relief, Gift Relief and Business Asset Disposal Relief

All three reliefs deal with capital gains tax (CGT) on business assets, but they work in different ways. You must pick the right one for the facts in the question.

Incorporation relief applies when a sole trader or partner transfers a business as a going concern, with all its assets (other than cash), to a company in exchange wholly or partly for shares. It applies automatically. The gain is not taxed now. It is deducted from the base cost of the new shares, so the gain is deferred until you sell the shares. You can elect to disapply it. If you take some of the consideration in cash or a loan account, only the part of the gain matching the share consideration is relieved.

Gift relief applies when you give away, or sell at an undervalue, qualifying business assets. These are assets used in a trade, and shares in an unlisted trading company or in your personal trading company. You and the donee must both make a joint election. The gain is held over and the donee's base cost is reduced by it. The donee then takes on the deferred gain.

Business asset disposal relief (BADR) does not defer anything. It reduces the rate of tax on qualifying gains to 14%. It is available on the disposal of all or part of a trading business you have owned for at least two years, on business assets sold within three years of the business ceasing, and on shares in your personal trading company. For shares, you must be an officer or employee, and you must hold at least 5% of the ordinary share capital and 5% of the voting rights. You must meet the conditions throughout the two years up to the disposal. If the disposal is of assets after the business has ceased, the two-year period ends on the date the business ceased. There is a lifetime limit of £1,000,000 of gains. Gains above the limit are taxed at the normal rates of 18% and 24%.

Investors' relief is a separate relief. It applies to new shares you subscribe for in an unlisted trading company and hold for the required period. You do not need to be an officer or employee. It also gives a 14% rate and has its own separate £1,000,000 lifetime limit.

Key rules to remember

CGT rates and annual exempt amount
Lower rate 18%; higher rate 24%; annual exempt amount £3,000
The tax tables give these figures for 2025/26. Apply the annual exempt amount first against gains taxed at the highest rate.
BADR and investors' relief
Rate 14%; lifetime limit £1,000,000 for each relief
The two limits are separate. Gains above the remaining limit are taxed at 18% or 24%.
Incorporation relief where shares and other consideration are received
Gain deferred = Total gain × Value of shares ÷ Total consideration
The remaining gain is taxable now. The base cost of the shares = market value of shares − gain deferred.
Base cost of shares after incorporation relief
Base cost = Value of shares received − gain deferred
If shares are the only consideration, all the chargeable gains are deferred.
Gift relief
Donee's base cost = Market value at gift − gain held over
This needs a joint election. The donor pays no tax on the held-over gain.
Ordering of gains with BADR
BADR gains are taxed at 14% and are treated as using the basic rate band first; annual exempt amount against gains taxed at the highest rate first
BADR gains are taxed at a flat 14%, whichever band they fall in. They still use up the basic rate band, so other gains are more likely to fall in the 24% band.

How to solve Incorporation Relief, Gift Relief and Business Asset Disposal Relief questions

Use this method for any question on business reliefs. First work out what the client is doing. Then test the conditions. Then compute the tax under each option.

  1. 1Identify the transaction: transfer of a business to a company, a gift, or a sale. Note who is involved and whether they are connected.
  2. 2Compute the gain on each chargeable asset, using proceeds or market value less cost. Do not forget goodwill, which often has nil cost.
  3. 3Test the conditions for each relief. For BADR, check the ownership period, the trading status and, for shares, the officer or employee test and the 5% tests. For gift relief, check the asset qualifies.
  4. 4Apply any deferral relief. For incorporation relief, restrict the gain deferred if there is non-share consideration. For gift relief, deduct the gain from the donee's base cost.
  5. 5Apply BADR to the qualifying gain, up to the remaining £1,000,000 limit. Taxable gains over the limit go to the normal rates.
  6. 6Deduct the annual exempt amount of £3,000 against gains taxed at the highest rate first, then compute the tax at 14%, 18% and 24%.
  7. 7State the base cost carried forward and any election needed, with its deadline if the question asks for it.
  8. 8If asked to advise, compare cash tax now against deferred tax and give a reasoned recommendation.

Quickest way: Four-question relief check

When to use it: Use this when you are short of time and need to choose and apply the right relief quickly.

  1. Is it a transfer of the whole business to a company for shares? If yes, incorporation relief applies automatically. Restrict it for any cash or loan consideration.
  2. Is it a gift or undervalue sale of qualifying business assets? If yes, gift relief is available by joint election.
  3. Is it a sale of a qualifying business or personal company shares? If yes, check two years' ownership, then apply 14% up to £1,000,000.
  4. Compute tax: apply the annual exempt amount to the highest-rate gains first. Then state the base cost carried forward and say what the client should elect.

Common mistakes in Incorporation Relief, Gift Relief and Business Asset Disposal Relief

  • Treating incorporation relief as optional to claim.

    Students mix it up with gift relief, which needs a joint election.

    Fix: State that incorporation relief applies automatically when the conditions are met. Say that an election is needed only to disapply it.

  • Deferring the whole gain when some consideration is cash or a loan account.

    Students forget that the relief is restricted to the share proportion.

    Fix: Use Gain × Shares ÷ Total consideration. Tax the balance now, and reduce the share base cost by the amount deferred only.

  • Applying BADR to shares without checking the 5% tests or the officer or employee condition.

    Students assume any trading company shareholding qualifies.

    Fix: Write out each condition against the facts in the scenario. Check the two-year period ends on the disposal date.

  • Confusing BADR with investors' relief.

    Both give a 14% rate and a £1,000,000 limit.

    Fix: Remember that BADR needs involvement in the business as owner, officer or employee. Investors' relief is for outside investors in new shares. The limits are separate.

  • Putting the annual exempt amount against the lowest-rate gains.

    Students apply it in the order the gains appear.

    Fix: Set it against gains taxed at 24% first, then 18%, then 14%. This gives the taxpayer the biggest saving.

  • Forgetting that BADR gains use up the basic rate band first.

    Students work out the band for other gains without BADR gains in mind.

    Fix: Treat BADR gains as using the basic rate band before other gains, even though they are taxed at 14%. Then see how much band remains for the other gains, which are taxed at 18% or 24%.

Worked examples

Example 1

Amara has run a sole trade for ten years. She transfers the whole business to a new company, Amara Ltd, as a going concern. The assets are goodwill worth £250,000 (nil cost), a freehold shop worth £180,000 (cost £100,000) and inventory worth £70,000. She receives shares worth £400,000 and a £100,000 director's loan account. Compute the CGT on the gain taxable now and the base cost of her shares. Assume BADR conditions are otherwise met with the full limit unused, that her annual exempt amount is unused, that she has no other gains, and that her income already uses the whole of her basic rate band.

Show the solution
  1. Gains: goodwill £250,000 − nil = £250,000. Shop £180,000 − £100,000 = £80,000. Inventory is not a chargeable asset. Total gain = £330,000.
  2. Total consideration = £400,000 shares + £100,000 loan = £500,000. This equals the total value of the assets (£250,000 + £180,000 + £70,000).
  3. Incorporation relief applies automatically. Gain deferred = £330,000 × £400,000 ÷ £500,000 = £264,000.
  4. Gain taxable now = £330,000 − £264,000 = £66,000.
  5. Split the gain taxable now by asset, using the proportion not covered by shares (£100,000 ÷ £500,000 = 20%). Goodwill: £250,000 × 20% = £50,000. Shop: £80,000 × 20% = £16,000. Total = £66,000.
  6. Base cost of the shares = £400,000 − £264,000 = £136,000.
  7. BADR does not apply to the goodwill gain. Goodwill is transferred to a close company in which Amara is a participator, and BADR is denied on that gain. The £50,000 goodwill gain is taxed at the normal rate. Her basic rate band is used up, so the rate is 24%.
  8. The £16,000 shop gain is part of the disposal of the whole of a trade she has run for ten years. It qualifies for BADR at 14% and is well within the £1,000,000 lifetime limit.
  9. Set the annual exempt amount against the gain taxed at the highest rate first. Goodwill gain after the annual exempt amount = £50,000 − £3,000 = £47,000.
  10. Tax on the goodwill gain = £47,000 × 24% = £11,280.
  11. Tax on the shop gain = £16,000 × 14% = £2,240.
  12. Total CGT = £11,280 + £2,240 = £13,520.

Answer: The gain taxable now is £66,000: £50,000 on goodwill with no BADR, taxed at 24%, and £16,000 on the shop, taxed at 14% with BADR. After the annual exempt amount, the CGT is £13,520. The base cost of the shares is £136,000.

Example 2

Kiran sells all her shares in Kiran Tech Ltd, her personal trading company, for a gain of £1,400,000. Assume Kiran Tech Ltd is a trading company and that Kiran has been a director (an officer of the company) throughout the two years up to the sale. She holds 100% of the shares and voting rights, and has done so for five years. She has already used £300,000 of her BADR lifetime limit. Her income already uses the whole of her basic rate band. She has no other gains and her annual exempt amount is unused. Compute her CGT.

Show the solution
  1. Remaining BADR limit = £1,000,000 − £300,000 = £700,000.
  2. The conditions for BADR are met: the company is a trading company, she has been an officer throughout the two years to disposal, and she holds at least 5% of the ordinary shares and voting rights. £700,000 of the gain is taxed at 14%. The remaining gain is £1,400,000 − £700,000 = £700,000, taxed at 24% because her basic rate band is used up.
  3. Apply the annual exempt amount against the 24% gain first: £700,000 − £3,000 = £697,000.
  4. Tax on the BADR gain = £700,000 × 14% = £98,000.
  5. Tax on the other gain = £697,000 × 24% = £167,280.
  6. Total CGT = £98,000 + £167,280 = £265,280.

Answer: Kiran's CGT is £265,280.

Exam tips

  • Write every condition for the relief next to the facts in the scenario. Markers give marks for applying the test, not just naming the relief.
  • If the question mentions cash, loan or other non-share consideration on incorporation, expect to restrict the relief. Show the fraction clearly.
  • Look for a tax-saving election or alternative, such as disapplying incorporation relief to use BADR. Compare the outcomes in numbers, then recommend one.
  • Use the tax tables given in the exam for rates and limits. State that you are using the 2025/26 rates as instructed. Show every working to the nearest £.
  • Include a short sentence on deadlines or the need for a joint election, and mention what the client should do next. This earns professional skills marks.

Practice questions from Alternative ways of achieving personal or business outcomes and their tax consequences

Incorporation Relief, Gift Relief and Business Asset Disposal Relief in other exams

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

Incorporation Relief, Gift Relief and Business Asset Disposal Relief: frequently asked questions

What is the difference between incorporation relief and gift relief?

Incorporation relief applies automatically when a business is transferred to a company wholly or partly for shares. Gift relief needs a joint election and applies to gifts or undervalue sales of qualifying business assets. In both cases the gain is deducted from the base cost of the asset or shares received.

What is the difference between BADR and investors' relief?

BADR is for people involved in a business, for example sole traders, partners, and officers or employees who hold at least 5% of a personal company. Investors' relief is for outside investors in new unlisted company shares. Both give a 14% rate and each has a separate £1,000,000 lifetime limit.

Can I use BADR when incorporation relief applies?

Incorporation relief defers the gain on the share consideration, so there is nothing to apply BADR to on that part. BADR can apply to any gain that is taxable now, such as the part relating to cash or loan consideration. You can also disapply incorporation relief by election if BADR is more beneficial.

How do I use the annual exempt amount with BADR gains?

Set the £3,000 annual exempt amount against the gains taxed at the highest rate first. BADR gains are taxed at 14%, so they come last for the annual exempt amount. They are treated as using up the basic rate band first, so other gains are more likely to fall in the 24% band.