Advanced Taxation (UK) · Taxation effects of the financial decisions made by businesses and individuals

Choice of Business Structure and Incorporation for ACCA ATX-UK

Updated 11 October 2026 · Fact-checked

Choice of business structure means comparing the tax cost of trading as a sole trader, partnership or company. On incorporation, gains on the business assets are automatically deferred under incorporation relief (s162 TCGA 1992) if shares are issued. You compare tax on profits, extraction, and the exit, then advise with reasons.

Understand Choice of Business Structure and Incorporation

A sole trader or partner is taxed on the profits of the business whether or not they are drawn out. The tax is income tax plus National Insurance, and the taxable profit is the trading profit after capital allowances. A company is a separate person. It pays corporation tax on its profits. The owner is taxed again only when profit is taken out as salary, dividends, pension contributions or benefits.

So the choice is about timing, rates and extraction. Corporation tax in the tax tables is a small profits rate of 19% and a main rate of 25%. Marginal relief applies between lower and upper limits of £50,000 and £250,000, using the standard fraction of 3/200. You compare that with the owner's income tax position and NIC, using the rates in the tax tables ACCA gives you. Do not rely on memory for rates that are not printed in the tables.

When a business is incorporated, the owner disposes of the business assets to the company. That is a chargeable disposal at market value if the owner is connected with the company, and the owner always is. This could create a large gain on goodwill and property. The law gives two main reliefs.

Incorporation relief (s162 TCGA 1992) applies automatically when you transfer a business as a going concern, with all its assets (other than cash), to a company wholly or partly in exchange for shares. The gain is deducted from the base cost of the shares. Nothing is paid now, and the gain comes back when you sell the shares.

Gift holdover relief (s165 TCGA 1992) is a separate relief for gifts of business assets. It is the fallback when incorporation relief does not apply, for example if no shares are issued. The owner and the company make a joint claim, and the gain is deducted from the company's base cost of the asset. Incorporation relief takes priority where it applies. You can choose to disapply incorporation relief by election so that you can claim business asset disposal relief (BADR) on the gain now. The tax tables give a BADR rate of 14% and a £1,000,000 lifetime limit.

Key rules to remember

Incorporation relief conditions: Business transferred as a going concern + all assets (other than cash) + wholly or partly for shares; If all three are met, relief is automatic. You do not claim it. You must elect if you do not want it.
Gain deferred when part of the consideration is not shares: Gain deferred = Total gain × Value of shares ÷ Total consideration; The remaining gain is chargeable now. It is the cash, loan account or other non-share part.
Base cost of the shares: Base cost = Market value of the shares − Gain deferred; The deferred gain comes back when the shares are sold.
CGT rates and annual exempt amount: 18% lower rate; 24% higher rate; AEA £3,000; From the tax tables for 2025/26.
BADR: Rate 14%; lifetime limit £1,000,000; The qualifying conditions must also be met. Remember this when you advise on disapplying incorporation relief.
Corporation tax marginal relief: (Upper limit − Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits; Applies where augmented profits are between £50,000 and £250,000. The small profits rate is 19% and the main rate is 25%.
SDLT on non-residential property: 0% up to £150,000; 2% on £150,001 to £250,000; 5% above £250,000; A transfer of non-residential property to the company may bring a charge based on market value.

How to solve Choice of Business Structure and Incorporation questions

Use this order for any question on business structure or incorporation. Read the requirement first so you only answer what is asked.

1Identify who the client is, what the business does, how much profit it makes and what the owner wants (cash now, growth, exit, protection).
2Decide what is asked. It could be a comparison of structures, the tax on incorporation, or a recommendation on reliefs.
3For a comparison, compute tax on the profit under each structure: income tax and NIC on the unincorporated profit, and corporation tax plus tax on extraction in the company. Use the tax tables for the rates.
4For incorporation, list the assets transferred, the gains on each, and the consideration. Check the three conditions for incorporation relief.
5Compute the gain deferred, the gain chargeable now, and the base cost of the shares. If there is a non-share part, use the proportion.
6Consider disapplying incorporation relief to claim BADR. Compare the 14% rate now with the deferral, using the £1,000,000 limit and the qualifying conditions.
7Cover the other taxes: capital allowances, SDLT on non-residential property, VAT on transfer of a going concern, and trading losses.
8Conclude with a clear recommendation, give your reasons, and mention non-tax factors briefly.

Quickest way: Incorporation in five checks

When to use it: Use this when a short requirement asks for the CGT effect of incorporating or which relief applies.

Check the three conditions: going concern, all assets other than cash, and shares as consideration.
If shares are the only consideration, the whole gain is deferred. Base cost of the shares = value of the shares − total gain.
If there is cash or a loan account as well, deferred gain = total gain × shares ÷ total consideration. The rest is taxable now.
Taxable now less AEA of £3,000, then tax at 14% if BADR applies, otherwise 18% or 24% depending on the band.
If no shares are issued, say that gift holdover relief is the alternative, claimed jointly. Then say whether the client should disapply to claim BADR.

Common mistakes in Choice of Business Structure and Incorporation

Saying that incorporation relief must be claimed
Students mix it up with gift relief, which needs a joint claim.
Fix: State that incorporation relief is automatic when the conditions are met. The taxpayer must elect to disapply it.
Deferring the whole gain when cash or a loan account is part of the price
Students stop once they see that shares were issued.
Fix: Always check the consideration. Deferred gain = total gain × shares ÷ total consideration. Tax the rest now.
Forgetting to reduce the base cost of the shares by the gain deferred
The deferral looks like the final answer.
Fix: Write the base cost working: market value of the shares less gain deferred. It is needed for any later sale.
Claiming BADR and incorporation relief on the same gain
Both reliefs sound beneficial, so students apply both.
Fix: If incorporation relief applies, no gain is chargeable. To use BADR you must disapply incorporation relief first.
Ignoring the other taxes on transfer
Students concentrate on CGT only.
Fix: Add a line each on capital allowances, SDLT on non-residential property, VAT on a going concern, and the use of any trading losses.
Comparing structures using profit only and ignoring extraction and exit
Corporation tax rates look lower than income tax rates.
Fix: Compare the total tax on the cash the owner actually receives, including salary, dividends and NIC. Then consider the future sale and whether BADR is available.

Worked examples

Example 1

Priya has traded as a sole trader for ten years. She transfers the whole business, with all assets other than cash, to a new company, Priya Ltd, as a going concern. The assets have a market value of £400,000 in total. She receives shares worth £300,000 and a director's loan account of £100,000. The total gains on the assets are £240,000. Calculate the gain chargeable now, the gain deferred and the base cost of her shares. Assume BADR applies to any gain chargeable now and she has made no other disposals this year. Calculate the CGT payable using the tax tables.

Show the solution

Conditions are met: going concern, all assets other than cash, and shares issued. Incorporation relief applies automatically to the part of the gain for the shares.
Total consideration = £300,000 shares + £100,000 loan account = £400,000.
Gain deferred = £240,000 × £300,000 ÷ £400,000 = £180,000.
Gain chargeable now = £240,000 − £180,000 = £60,000.
Base cost of shares = £300,000 − £180,000 = £120,000.
CGT: £60,000 less annual exempt amount £3,000 = £57,000 taxable. BADR rate is 14%, so CGT = £57,000 × 14% = £7,980.

Answer: Gain deferred £1,80,000; gain chargeable now £60,000; base cost of the shares £1,20,000; CGT payable £7,980.

Example 2

Rahul, a sole trader, transfers his business as a going concern to a company for shares worth £500,000 only. The total gain on the assets is £300,000. He has no other gains this year and has not used any BADR. The BADR conditions are met. Show the CGT position if incorporation relief applies, and if he elects to disapply it so that BADR applies. Explain the effect on the base cost of the shares.

Show the solution

Incorporation relief applies automatically: shares are the only consideration, so the whole gain of £300,000 is deferred. CGT now is nil.
Base cost of shares = £500,000 − £300,000 = £200,000.
If Rahul elects to disapply: the gain of £300,000 is chargeable now. BADR applies, and £300,000 is within the £1,000,000 lifetime limit.
Taxable gain = £300,000 − AEA £3,000 = £297,000.
CGT = £297,000 × 14% = £41,580.
Base cost of the shares is then £500,000, the market value of the shares, because no gain has been deducted.
The choice is nil tax now and a larger later gain, against £41,580 now and a higher base cost. Compare against the likely tax on a later share sale, including whether BADR will be available then.

Answer: With incorporation relief: CGT nil, base cost £2,00,000. With disapplication and BADR: CGT £41,580, base cost £5,00,000.

Exam tips

Show the three conditions for incorporation relief in your answer. Marks are given for stating them and applying them to the facts.
Always do the base cost working for the shares, even if only a short answer is requested.
When the facts give cash or a loan account, expect a partial deferral. Check the consideration before you compute anything.
In a recommendation, mention both tax and non-tax points: cash needs, extraction of profits, limited liability and exit. These help with the professional skills marks.
Use only the rates in the tax tables for CGT, corporation tax and SDLT. State any assumption you make, for example that BADR conditions are met.

Practice questions from Taxation effects of the financial decisions made by businesses and individuals

Choice of Business Structure and Incorporation: frequently asked questions

What is the difference between incorporation relief and gift relief?

Incorporation relief is automatic and applies when a business is transferred to a company wholly or partly for shares. Gift holdover relief is a joint claim for gifts of qualifying business assets. If shares are issued for the business, incorporation relief takes priority.

Can I claim BADR when I incorporate?

Yes, but you must first elect to disapply incorporation relief. The gain is then chargeable now, taxed at the BADR rate of 14% within the £1,000,000 lifetime limit. You must also meet the qualifying conditions.

Which section covers incorporation relief?

Incorporation relief is in s162 TCGA 1992. Gift holdover relief for business assets is in s165 TCGA 1992. In the exam, you earn marks for applying the rules, so the section number is a bonus.

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

No. It depends on profit level, how much cash the owner needs, extraction method and plans for exit. Compare the total tax on the cash received, using the tax tables, and add non-tax factors such as limited liability and compliance.