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Advanced Taxation (UK) · Income tax: income from self-employment

Business Reliefs: Incorporation, Cessation and Disposal of a Sole Trader Business

Updated 11 October 2026 · Fact-checked

When you incorporate, sell or close a sole trader business, you must find the gains and choose the reliefs. Incorporation relief defers the gain into the share base cost automatically. Business asset disposal relief taxes qualifying gains at 14% up to a £1,000,000 lifetime limit. Then compare the tax cost of each structure.

Understand Business Reliefs: Incorporation, Cessation and Disposal

A sole trader is taxed on business profits through income tax and National Insurance. A company is a separate person. It pays corporation tax on its profits, and the owner is taxed again when profits are taken out as salary or dividends. Moving between these structures, or ending the business, is a disposal of business assets. It can create capital gains, balancing adjustments on capital allowances, and other taxes.

On incorporation, the sole trader transfers the business to a company. If the business is transferred as a going concern, with all its assets (cash may be left out), wholly or partly in exchange for shares, incorporation relief applies automatically. The gain is not taxed now. It is deducted from the base cost of the shares and is taxed when you later sell them. Any consideration that is not shares, such as cash or a director's loan account, is taxed straight away on its share of the gain.

You can elect to disapply incorporation relief, within a time limit (broadly two years after the 31 January following the tax year of transfer). Then the gain is taxed now, but business asset disposal relief (BADR) can reduce the rate. For 2025/26 the BADR rate is 14% on qualifying gains, up to a lifetime limit of £1,000,000. Gains above the limit are taxed at 18% or 24%. Gift holdover relief (TCGA 1992 s165) is the alternative deferral. It applies to gifts of business assets, and you will see it mentioned when students compare it with incorporation relief (s162). On a transfer to a company for shares, incorporation relief takes priority automatically.

On cessation or sale, the owner may qualify for BADR on the disposal of the whole business, or of its assets within three years after cessation. The owner must have owned the business for at least two years before the disposal or cessation. On cessation, capital allowances give balancing allowances or charges and the final tax year follows the closing year rules.

The exam rarely asks only for a calculation. You must advise: compare structures, quantify the tax on each route, and flag side issues such as SDLT on property, VAT on a going concern transfer, and cash flow. Use the figures in the tax tables, and explain why each route is better or worse for this client.

Key rules to remember

Incorporation relief: gain deferred
Gain deferred = Total gain × Value of shares received ÷ Total consideration
Total consideration includes shares, cash and any loan account. The rest of the gain is chargeable now.
Base cost of shares
Base cost = Market value of shares received − Gain deferred
This is what you use when the shares are later sold, so the deferred gain is taxed then.
BADR rate and limit
Qualifying gains taxed at 14% up to £1,000,000 lifetime limit
Gains above the limit are taxed at 18% (basic rate band) or 24%. Investors' relief has the same rate and limit but applies to shares.
CGT annual exempt amount
Annual exempt amount = £3,000
Deduct it from the net gains before applying the rate. Set it where it saves the most tax, which is usually against gains taxed at the highest rate.
BADR qualifying conditions (sole trader)
Disposal of whole or part of a trading business, or its assets within 3 years after cessation; owned for at least 2 years
For shares in a personal company the conditions differ: at least 5% of ordinary share capital and voting rights, plus office or employment, for 2 years.
Corporation tax rates
Small profits rate 19% (profits up to £50,000); main rate 25% (profits over £250,000); marginal relief between
Marginal relief = (£250,000 − Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits.
SDLT on non-residential property
Up to £150,000: 0%; £150,001 to £250,000: 2%; £250,001 and above: 5%
A transfer of a business property to a company is a land transaction, so check SDLT in an incorporation.

How to solve Business Reliefs: Incorporation, Cessation and Disposal questions

Use this method for any question on incorporating, closing or selling a business.

  1. 1Read the requirement and the client's objectives. Decide whether you must compute tax, compare routes, or advise on a plan, and note the professional skills marks.
  2. 2List the assets and the consideration. Identify what is transferred (goodwill, property, plant, cash) and what is received (shares, cash, loan account).
  3. 3Compute the chargeable gains asset by asset. Note any assets with no gain or only a loss, and any trading stock and capital allowances effects.
  4. 4Test the reliefs. Check that incorporation relief conditions are met (going concern, all assets, shares received). Check BADR conditions (two years' ownership, cessation timing). Consider gift relief if shares are not part of the consideration.
  5. 5Compute the tax for each route. Calculate the gain deferred or chargeable, deduct the annual exempt amount, then apply 14% to qualifying gains within the £1,000,000 limit and 18% or 24% to the rest.
  6. 6Deal with the side issues: SDLT on property, VAT on transfer of a going concern, capital allowances elections, and the extraction of profits.
  7. 7Compare the structures after the transaction: income tax and NIC for the sole trader against corporation tax and extraction costs for the company. Use the tax table rates.
  8. 8Give a clear recommendation with reasons, the deadlines for elections, and any assumptions you made.

Quickest way: Incorporation or sale in six lines

When to use it: Use it when time is tight and the question asks for a recommendation with numbers.

  1. Write total gain, then the split of consideration into shares and non-shares.
  2. Deferred gain = total gain × shares ÷ total consideration. Chargeable now = the rest.
  3. Share base cost = share value − deferred gain.
  4. Subtract £3,000 annual exempt amount from the chargeable gain.
  5. Tax at 14% if BADR applies, otherwise 18% or 24%. Check the £1,000,000 lifetime limit.
  6. Add one line for each side issue (SDLT, VAT, capital allowances) and close with a recommendation.

Common mistakes in Business Reliefs: Incorporation, Cessation and Disposal

  • Forgetting that incorporation relief is automatic and applying BADR without disapplying it.

    Students focus on the lower BADR rate and miss that the relief for shares is given by default.

    Fix: State that incorporation relief applies unless an election is made, and give the election deadline. Only then compute the BADR alternative.

  • Deferring the whole gain when the owner also takes cash or a loan account.

    The formula is learned as 'all gain deferred' rather than as a proportion.

    Fix: Always compute deferred gain = total gain × shares ÷ total consideration. Tax the remainder now.

  • Using the wrong BADR rate or ignoring the lifetime limit.

    Old rates or earlier BADR use by the client are remembered from other papers.

    Fix: Use 14% and £1,000,000 from the tax tables. Check whether the client used any of the limit before, and tax the excess at 18% or 24%.

  • Claiming BADR on cessation when the assets are sold too long after the business stops.

    Students check the two-year ownership test but not the three-year window after cessation.

    Fix: Check both: two years' ownership up to cessation, and disposal within three years after cessation.

  • Ignoring other taxes in an incorporation: SDLT, VAT and capital allowances.

    The CGT computation takes most of the time, so side issues are dropped.

    Fix: Add a short checklist at the end: SDLT on property, VAT transfer of a going concern treatment, and the capital allowances transfer election.

  • Comparing structures using profits before tax only.

    Students forget that profit taken out of a company is taxed again as salary or dividends.

    Fix: Compare total tax and NIC on the owner and company for the same level of drawings, and mention cash flow and retained profit.

Worked examples

Example 1

Priya, a sole trader for ten years, ceases trading and sells the business goodwill for a gain of £450,000. She has no other gains, has not used BADR before and is a higher rate taxpayer. Calculate her CGT and the saving from BADR.

Show the solution
  1. Conditions: she has owned the business for more than two years and sells the whole business on cessation, so BADR is available.
  2. Gain £450,000 is within the £1,000,000 lifetime limit.
  3. Deduct the annual exempt amount: £450,000 − £3,000 = £447,000.
  4. CGT at 14%: £447,000 × 14% = £62,580.
  5. Without BADR the tax at 24% would be £447,000 × 24% = £107,280.
  6. Saving from BADR = £107,280 − £62,580 = £44,700.

Answer: CGT payable is £62,580. BADR saves £44,700 compared with the 24% rate.

Example 2

Tom, a sole trader for six years, transfers his whole business to a new company. Goodwill has a gain of £200,000 and a freehold property has a gain of £100,000. The assets are worth £500,000 in total. He receives shares worth £450,000 and a loan account of £50,000. He pays no other tax on the transaction. Calculate the gain deferred, the CGT payable now and the base cost of his shares. State what happens if he elects to disapply incorporation relief.

Show the solution
  1. Incorporation relief applies automatically: business transferred as a going concern, with all assets, partly for shares.
  2. Total gain = £200,000 + £100,000 = £300,000. Total consideration = £450,000 + £50,000 = £500,000.
  3. Gain deferred = £300,000 × £450,000 ÷ £500,000 = £270,000.
  4. Gain chargeable now = £300,000 − £270,000 = £30,000.
  5. Deduct the annual exempt amount: £30,000 − £3,000 = £27,000.
  6. BADR applies as Tom has owned the business for over two years: £27,000 × 14% = £3,780.
  7. Base cost of shares = £450,000 − £270,000 = £180,000.
  8. If he elects to disapply: gain £300,000 − £3,000 = £297,000 at 14% = £41,580 now. The shares would then have a base cost equal to their market value of £450,000.

Answer: Gain deferred £270,000; CGT now £3,780; base cost of shares £180,000. If he disapplies the relief, the CGT is £41,580 now but the deferred gain does not reduce the share base cost.

Exam tips

  • Show the incorporation relief proportion in a separate working. Markers give marks for the fraction even if the final figure is wrong.
  • State the conditions for each relief and apply them to the facts. The scenario usually hides a trap such as ownership under two years or a missing asset.
  • Use the tax table figures only: 14% BADR, £1,000,000 limit, £3,000 annual exempt amount, and the corporation tax rates. Do not use rates from memory.
  • Finish a comparison question with a recommendation and a reason, and mention the election deadline. These earn the professional skills marks.
  • Add short comments on SDLT, VAT, capital allowances and cash flow. They are often the easy marks.

Practice questions from Income tax: income from self-employment

Business Reliefs: Incorporation, Cessation and Disposal in other exams

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

Business Reliefs: Incorporation, Cessation and Disposal: frequently asked questions

Is incorporation relief automatic?

Yes, if the conditions are met. The business must be transferred as a going concern with all its assets (cash may be excluded), wholly or partly for shares. You can elect to disapply it within the time limit if you prefer to claim BADR.

How is gift holdover relief different from incorporation relief?

Incorporation relief defers the gain on a transfer to a company in exchange for shares and applies automatically. Gift relief needs a claim and applies to gifts of business assets, or to sales at undervalue. If the consideration is shares, incorporation relief takes priority.

Can I claim BADR when I close my business?

Yes, if you have owned the business for at least two years up to cessation. The disposal must be of the whole business or part of it, or of its assets within three years of cessation. The gain is taxed at 14% up to a £1,000,000 lifetime limit.

Is a limited company always better than being a sole trader?

No. It depends on profit level, how much the owner needs to draw, and the cost of extracting profits. Compare total income tax, NIC and corporation tax for the same drawings, and consider other factors like limited liability and compliance.