Advanced Taxation (UK) · Capital gains tax: the use of exemptions and reliefs in deferring and minimising tax liabilities

Incorporation Relief and Share Reorganisations for ACCA ATX

Updated 11 October 2026 · Fact-checked

Incorporation relief (TCGA 1992 s162) automatically defers the gain when you transfer a business as a going concern, with its assets, to a company for shares. The gain is deducted from the shares' base cost. If you take cash too, that part is taxed now. Share exchanges and reorganisations similarly roll the old base cost into the new shares.

Understand Incorporation Relief and Share Reorganisations

When a sole trader or partnership transfers a business to a company, the transfer is a disposal of each asset at market value, because the company is a connected person. That can create large gains on goodwill and property, with no cash received to pay the tax. Incorporation relief solves this.

Incorporation relief applies automatically if three conditions are met. The business is transferred as a going concern. All its assets (other than cash, which may be left out) are transferred. The consideration is wholly or partly shares in the company. The gain on the assets is not taxed now. It is deducted from the base cost of the shares, so it is taxed when you sell the shares.

If part of the consideration is not shares, for example cash or a credit to a director's loan account, the relief is restricted. The share proportion of the gain is deferred. The rest is chargeable now.

The relief is not optional. You do not claim it. You only need an election under s162A if you want to disapply it so that the whole gain is brought into charge now. You might do this to use more of the annual exempt amount, or to have the whole gain taxed at the BADR rate of 14% instead of deferring it into shares that might later be taxed at 24%.

You do not need to elect out to use business asset disposal relief (BADR) on the part of the gain that is chargeable now. If the BADR conditions are met, you can claim BADR on that part, so it is taxed at 14% under the tables. The deferred part is not charged now, so BADR cannot apply to it.

Share reorganisations follow a similar idea. A bonus issue, rights issue or share split is not treated as a disposal. The new shares are treated as the same asset as the old, with the same acquisition date, and any extra cost for a rights issue is added to the cost. In a share-for-share exchange, you swap shares in one company for new shares in another. If the acquiring company ends up with control, and the exchange is for genuine commercial reasons rather than avoiding tax, there is no disposal. The new shares take over the old base cost.

Cash received in a share exchange is a part disposal of the old shares. Loan notes are different. If you receive qualifying corporate bonds (QCBs), the gain on the shares exchanged is calculated at the exchange and becomes chargeable when the QCBs are later disposed of or redeemed. So there is deferral of the tax, but no exemption of that gain. The QCBs themselves are exempt assets on disposal. Non-qualifying loan notes are treated like shares, so the old base cost rolls into them.

Key rules to remember

Incorporation relief conditions (s162): Going concern + all assets (cash excepted) + consideration wholly or partly shares; If all conditions are met, the relief applies automatically. You must elect under s162A to disapply it.
Gain deferred (mixed consideration): Gain deferred = Total gain × Value of shares ÷ Total consideration; The remainder of the gain is chargeable now. Cash and loan account credits are not shares.
Base cost of the shares: Base cost = Market value of shares − Gain deferred; This is how the deferred gain is taxed later, when the shares are sold.
Gain taxable now: Chargeable gain now = Total gain − Gain deferred; Deduct the annual exempt amount of £3,000. BADR at 14% can be claimed on this part if the conditions are met, otherwise 18% or 24%. The deferred part is not charged, so BADR does not apply to it.
Part disposal on cash in a share exchange: Cost allocated = Original cost × A ÷ (A + B); A = cash received. B = market value of new shares at the exchange. The cash gain = A − cost allocated.
Bonus or rights issue: No disposal. Bonus: cost unchanged, more shares. Rights issue: add the cost of new shares to the cost.; Use the same acquisition date as the original holding.
Rates from the tax tables: CGT: 18% lower rate, 24% higher rate. Annual exempt amount £3,000. BADR 14%, lifetime limit £1,000,000.; Taken from the ATX-UK tables for 2025/26, which you are told to assume continue.

How to solve Incorporation Relief and Share Reorganisations questions

Use this order for any incorporation or share exchange question. Always say what the relief is and whether it applies, before you calculate.

1Identify the transaction: transfer of a business to a company, bonus or rights issue, or share exchange or takeover.
2Test the conditions. For incorporation: going concern, all assets other than cash, shares in the consideration. For a share exchange: control of the target is acquired, and there are genuine commercial reasons.
3Compute the gain on each asset at market value (goodwill, property, other chargeable assets) using proceeds less cost, and total them.
4Split the consideration into shares and non-shares. Deferred gain = total gain × shares ÷ total consideration.
5Compute the gain taxable now. Deduct losses and the annual exempt amount. If the BADR conditions are met, claim BADR on this part and tax it at 14%. Otherwise use 18% or 24% depending on the taxpayer's income.
6Calculate the new base cost of the shares: market value less the deferred gain.
7Consider the alternatives: the s162A election to bring the whole gain into charge now, or gift holdover where relevant. Compare tax now against tax later and cash flow.
8Show the final tax, and state any assumptions or the planning advice the question requires.

Quickest way: Fast incorporation check

When to use it: Use this when a Section A or B question gives the asset values and asks for the CGT on incorporation, or asks whether to elect out.

Write the total gain first, one line per asset.
Ask: is any consideration other than shares? If not, the whole gain is deferred and tax now is nil.
If there is cash or a loan account, work out the fraction of shares. Apply it to the total gain.
Chargeable now = total gain less deferred gain. Then the AEA and the rate.
Base cost = share value less deferred gain. Check by adding base cost and deferred gain: the total should equal the share value.
Say in one line whether BADR can be claimed on the part taxed now, and whether electing out under s162A to bring the whole gain into charge might help.

Common mistakes in Incorporation Relief and Share Reorganisations

Treating incorporation relief as an election that must be claimed.
Gift holdover relief is a joint claim, so students assume all CGT deferral reliefs need a claim.
Fix: State that s162 applies automatically if the conditions are met, and that you need an election under s162A to disapply it.
Deferring the whole gain when some consideration is cash or a loan account credit.
Students stop once they see that shares were issued.
Fix: Always split the consideration. Only the share proportion is deferred. The rest is taxable now.
Forgetting that all the business assets must be transferred.
Students focus on goodwill and the building and ignore the rest of the scenario.
Fix: Read for assets kept back. Cash may be retained. If other assets, such as a property, are retained, the relief is not available under s162.
Calculating the base cost of the shares as the cost of the business assets.
Students confuse the asset cost with the share cost.
Fix: Base cost of the shares = market value of the shares less the deferred gain.
Treating a share exchange as a disposal when no cash is received.
Students see a swap and apply ordinary disposal rules.
Fix: If the conditions are met there is no disposal. The new shares take the old cost and date. Only cash is a part disposal.
Using the wrong rate or forgetting the annual exempt amount on the gain taxable now.
Students rush the final step and take 24% automatically.
Fix: Deduct £3,000, then check whether BADR at 14% applies. If not, choose 18% or 24% from the taxpayer's income.

Worked examples

Example 1

Priya has run an unincorporated business for ten years. She transfers the whole business, including all assets, as a going concern to Priya Ltd. The assets are worth £400,000 in total and her total chargeable gains on them are £240,000. She receives shares worth £300,000 and £100,000 credited to her loan account. BADR conditions are met and her lifetime limit is unused. She claims BADR on the gain that is chargeable now and does not elect under s162A. Calculate the gain taxable now, the CGT, and the base cost of her shares. Assume the 2025/26 rates.

Show the solution

Check the conditions: going concern, all assets transferred, and shares are part of the consideration. So s162 applies automatically and she does not need to elect.
Total consideration = £300,000 + £100,000 = £400,000. Shares are £300,000 of it.
Gain deferred = £240,000 × £300,000 ÷ £400,000 = £180,000. This part is not charged now, so BADR cannot apply to it.
Gain taxable now = £240,000 − £180,000 = £60,000 (the part matching the loan account credit).
BADR can be claimed on this £60,000 because the conditions are met.
Deduct the annual exempt amount: £60,000 − £3,000 = £57,000.
Tax at the BADR rate of 14%: £57,000 × 14% = £7,980.
Base cost of the shares = £300,000 − £180,000 = £120,000.

Answer: Gain deferred £180,000. Gain taxable now £60,000, less £3,000 AEA = £57,000, CGT £7,980 at 14% on a BADR claim for the part chargeable now. Base cost of the shares is £120,000. Electing out under s162A would only be needed to bring the whole gain into charge now.

Example 2

Tom holds 10,000 shares in Target Ltd, which cost £20,000. Bidder plc acquires all of Target Ltd's shares and Tom receives new Bidder plc shares worth £90,000 plus £10,000 cash. The exchange is for genuine commercial reasons and gives Bidder plc control of Target Ltd. Tom is a higher rate taxpayer and has not used his annual exempt amount. BADR does not apply. Calculate the CGT.

Show the solution

The conditions are met, so the exchange of shares is not a disposal. Only the cash is treated as a part disposal.
Total value received = £90,000 + £10,000 = £100,000. Total gain on the old shares = £100,000 − £20,000 = £80,000. Most of it is deferred because only the cash is taxed now.
Cash A = £10,000. Value of new shares B = £90,000.
Cost allocated to the cash = £20,000 × £10,000 ÷ (£10,000 + £90,000) = £2,000.
Gain on the cash = £10,000 − £2,000 = £8,000.
Deduct the annual exempt amount: £8,000 − £3,000 = £5,000.
Tax at 24% as a higher rate taxpayer: £5,000 × 24% = £1,200.
Base cost of the new Bidder plc shares = £20,000 − £2,000 = £18,000.
Check: gain deferred = £80,000 − £8,000 = £72,000. Value of new shares less deferred gain = £90,000 − £72,000 = £18,000, which agrees.

Answer: Chargeable gain on the cash is £8,000. After the £3,000 annual exempt amount, CGT is £1,200 at 24%. The Bidder plc shares have a base cost of £18,000.

Exam tips

State the conditions for the relief before you calculate. Examiners give marks for naming the relief and the automatic nature of s162.
Always test the consideration for cash or loan account credits. A question that mentions a director's loan account is hinting at a partial deferral.
Say that BADR can be claimed on the part of the gain chargeable now, if the conditions are met, without electing out. Use the s162A election as a planning point only when you want the whole gain taxed now, for example to use the annual exempt amount or to bring all of it into BADR at 14%.
Use the tax tables given in the exam. Do not rely on memory for rates, and state any assumptions clearly, such as the lifetime BADR limit being unused.
Show the base cost of the new shares as a separate line. It is easy to earn marks and often forgotten.

Practice questions from Capital gains tax: the use of exemptions and reliefs in deferring and minimising tax liabilities

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 Applied SkillsIncorporation Relief and Share Reorganisations

Incorporation Relief and Share Reorganisations: frequently asked questions

Is incorporation relief automatic?

Yes. If a business is transferred as a going concern with all its assets (other than cash) to a company in exchange wholly or partly for shares, s162 applies without a claim. You must make an election under s162A to disapply it.

Incorporation relief or gift holdover: which is better?

Incorporation relief applies where shares are issued as consideration, and it defers the share proportion of the gain. Gift holdover is for gifts or sales at undervalue, and needs a joint claim. If you do not receive shares in return, the gift route may be the only option. Compare the cash flow and the tax later.

Why would you elect out of incorporation relief?

To bring the whole gain into charge now, for example to use the annual exempt amount or to have all of it taxed at the BADR rate of 14%, if the conditions are met. This can be better than deferring the gain and facing 24% later on the sale of the shares. You do not need to elect out just to claim BADR on the part of the gain that is already chargeable now.

How does a share-for-share exchange work for CGT?

If the acquiring company gains control and the exchange is for genuine commercial reasons, you are not treated as disposing of your old shares. The new shares take over the old cost and acquisition date. Any cash you receive is a part disposal.