Many portfolio landlords are interested to know what is involved in the incorporation process.
This BLOG is the result of shortening many 100s of pages of information into the summary below:
Eligibility and scope of TCGA 1992 s162 :
Confirm that the transfer qualifies as the transfer of a business as a going concern, that all assets other than cash are transferred, and that consideration is wholly or partly in shares; assemble robust evidence that a genuine business (not merely investment assets) is being incorporated, and align the VAT position as a TOGC where applicable to corroborate going‑concern status.
Points of vigilance :
■ Verify that the transferor is an individual or partnership (i.e. not a company) and that the transferee is a company issuing shares to the transferor; relief is automatic if conditions are met and rolls gains into the base cost of the shares.
■ Evidence a business “as a going concern” and the transfer of “all the business assets (or all except cash)” through contracts, customer lists, stock, plant, employees, and continuity of trade; avoid excluding key operating assets.
■ Where VAT applies, structure the transfer as a TOGC to avoid output VAT and support going‑concern continuity; ensure buyer registration and no significant break in trading.
■ HMRC will scrutinise whether a business (as opposed to a mere bundle of assets) has been transferred; retain sale contracts, adverts, correspondence, and payroll/employee transfer records.
■ Property‑heavy or property‑only activities: assess whether there is a real business of property dealing/management with services and organisation, not a passive asset transfer, to sustain s162 eligibility (domain: tax law)*.
■ Consider interaction with other CGT reliefs (BADR and gift relief) which may be alternatives or complements where gains exceed share consideration or conditions for BADR are otherwise met.
Consideration, liabilities, and base cost mechanics
Map all forms of consideration (shares, cash, non‑share items, and liability assumptions) and quantify immediate chargeable gains where consideration is not entirely in shares; compute the held‑over gain and adjusted share base cost precisely, especially where multiple share classes or mixed consideration are used.
Points of vigilance :
■ Mixed consideration triggers an immediate gain for the non‑share element; apportionment is across the business as a whole, not asset‑by‑asset.
■ HMRC accepts reasonable delay in issuing shares if commercially unavoidable, but shares must be issued promptly once the obstacle is removed; document the reason and timing.
■ By extra‑statutory concession, assumption of business liabilities is not treated as consideration for s162, but non‑business liabilities are; track which liabilities are business‑related and how they affect share cost.
■ Use the step method to compute the deferrable gain and the proportion attributable to shares; where connected, share value is capped at the lower of share MV and asset value.
■ Adjust the base cost of the new shares by reducing it for the gain held over; where multiple classes are issued, apportion by class market values at issue.
■ Leaving consideration outstanding as a director’s loan creates non‑share consideration, crystallising proportionate gain on incorporation; model cash‑flow and CGT impact.
Partial transfers, multiple transferors, and land taxes (SDLT/LBTT/LTT)
Avoid partial business transfers (which jeopardise s162) unless the whole business (or all except cash) moves for each transferor; for partnerships or spouses, ensure each proprietor transfers their business interest correctly, and plan for property tax exposure on land transfers, including partnership and anti‑avoidance rules.
Points of vigilance
■ Relief requires transfer of all business assets (except cash) by the transferor; staged or piecemeal transfers risk denial or fragmentation of relief and adverse apportionment.
■ For partnerships, consider FA 2003 Sch 15 on contributions of land to partnerships and subsequent incorporations; understand when a charge arises on transfers into partnership and how elections for investment partnerships work.
■ Property transfers on incorporation are subject to SDLT/LBTT/LTT based on consideration, effective date, and use; apply the correct devolved regime and apportion consideration if transactions straddle jurisdictions.
■ Be alert to SDLT anti‑avoidance for group relief and arrangements involving indirect provision of consideration or imminent degrouping; relief may be denied where arrangements are in place at the effective date.
■ Review linked transactions and series rules to prevent unintended higher rates or aggregation affecting SDLT outcomes on multi‑step incorporations involving land.
■ For LLP steps, note specific SDLT relief on partnership‑to‑LLP transfers if mirror‑image conditions are met within one year; test carefully if using LLP as a precursor or bridge.
Goodwill and other intangibles on incorporation
For related‑party incorporations, plan for corporation tax treatment under CTA 2009 Part 8, recognising restrictions on debits for goodwill and customer‑related intangibles acquired from individuals/partnerships post‑2019, and apply the fixed‑rate relief only where conditions are satisfied.
Points of vigilance
■ Post‑1 April 2019, a deemed fixed‑rate deduction at 6.5% may apply to goodwill and specified customer‑related intangibles only where acquired as part of a business with qualifying IP acquired for use; otherwise relief is limited to realisation debits.
■ Where goodwill is acquired from a related individual or related firm on incorporation and the transferor did not themselves acquire it from a third party, ongoing amortisation debits are denied, leaving only realisation debits.
■ Track the cap where expenditure on goodwill exceeds a six‑times ratio to qualifying IP; compute the cap to determine the deductible amount under the post‑2019 rules.
■ Be mindful of pre‑2019 transitional regimes and legacy restrictions, including the 2014–2015 related‑party restrictions and 2015–2019 general denial of amortisation.
■ HMRC’s stance on goodwill creation and recognition can be stringent; arguments based on merger synergies or accounting recognition do not create new post‑FA02 goodwill for relief purposes.
■ Consider interactions with BADR at the individual level before incorporation and with gift relief where immediate chargeable gains arise due to non‑share consideration.
Claims, elections, timing, and interaction with capital allowances
Incorporation relief is automatic if conditions are met, but the transferor may elect to disapply it under s162A within statutory time limits to facilitate BADR or other planning; ensure prompt share issue and consider capital allowances elections on plant and machinery to manage balancing charges and pools (domain: tax law)*
Points of vigilance
■ s162A election to disapply must be made by 31 January following the relevant tax year, with deadlines differing depending on whether the shares are sold in the tax year after acquisition; diarise and align with intended disposals.
■ Use disapplication where BADR would otherwise be lost on incorporation, or where a higher base cost in shares is preferred; model CGT, NICs, and corporation tax consequences across scenarios.
■ Ensure shares are actually issued and valued appropriately; HMRC allows a short delay where justified, but undue delay risks the relief; retain board minutes and share allotment filings.
■ For plant and machinery, consider capital allowances treatment and whether to elect for tax‑written‑down value transfers to avoid balancing events on incorporation (domain: tax law)*.
■ When non‑share consideration is intended (e.g. director loan credit), quantify immediate gains and confirm availability of s165 gift relief for business assets to defer part of the crystallised gain where conditions are met.
■ Keep comprehensive evidence and computations to withstand HMRC review; align VAT TOGC paperwork and property tax filings to the incorporation timetable.
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Get in touch if you have a portfolio and want to learn more about how to use incorporation as a method of enveloping your property portfolio.
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