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

Priya is a sole trader who will transfer her entire business to a new limited company in exchange for all of its shares. She has owned the business for six years, and the gain on the goodwill and premises is £300,000. Which statement best describes the capital gains tax position if the incorporation qualifies for incorporation relief?

Incorporation relief applies automatically when a business is transferred as a going concern with all its assets for shares. The gain is deducted from the shares' base cost, so no capital gains tax arises on incorporation. The gain is deferred until the shares are sold, not exempted.

  1. AThe gain is deferred by deducting it from the base cost of the shares received, so no capital gains tax arises on incorporationCorrect
  2. BThe gain is taxed immediately at 24%, with the £3,000 annual exempt amount available
  3. CThe gain is exempt permanently because the shares are issued by a company she controls
  4. DThe gain is taxed at 14% only if she elects out of incorporation relief, otherwise at 18%

Explanation

Where a business is transferred as a going concern with all its assets in exchange for shares, incorporation relief applies automatically. The gain is rolled into the base cost of the shares, so it is deferred, not exempt. Taxing it at once at 24% would apply only if the relief did not apply, for example if she elected out.

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