If you transfer your sole trader or partnership business to a limited company, for capital gains tax (CGT) purposes it’s treated the same as if you sold your business at “market value” and if that’s more than the cost of the business assets transferred, the difference might be taxable as a capital gain.
Incorporation relief However where all the assets of the business (apart from cash) are transferred to the company in exchange for shares, any capital gain is deferred until you sell or transfer those shares. However, this may not be the most tax efficient option and the rules allow you to elect not to defer the gain.
If your business has Goodwill, then this will be a capital gain and could be deferred – but – if the gain is less than the your annual CGT exemption (and you have no other gains to declare) then it may be best to recognise the gain – and pay no tax on it. This will also mean that you can draw that goodwill value form the company without further tax to pay.
Holdover relief If incorporation relief doesn’t apply or you have elected for it not to, you can instead elect for the capital gain to be held over. This means the gain is deferred until the company sells the assets that were transferred from the unincorporated business.
As an example, if you transfer your business to a company in which you own all the shares, incorporation relief will apply to the gain unless an election is made for it not to apply.
However, you and the company can jointly elect for incorporation relief not to apply meaning that the gain would be chargeable to tax. You can then also elect for holdover relief to apply instead and the effect of this is to defer the gain until the company sells the business assets transferred to it.
Both incorporation and holdover relief can prevent a CGT charge when a business is transferred to a company but holdover relief is more flexible.