What Is Incorporation Relief for Property Businesses?

Incorporation relief can defer Capital Gains Tax when transferring property into a company. Find out how it works, who qualifies, and when landlords can claim it.

Introduction

Many landlords start out owning properties in their personal names but later consider transferring them into a limited company. This is often done to benefit from lower Corporation Tax rates, full mortgage interest relief, and more efficient inheritance planning. However, transferring personally owned properties into a company is treated as a sale for tax purposes, which can trigger a significant Capital Gains Tax (CGT) bill.

This is where incorporation relief can help. If your property letting qualifies as a business rather than a simple investment, incorporation relief allows you to defer paying CGT when transferring your portfolio into a company. This article explains what incorporation relief is, how it works, and when landlords can claim it.

What Is Incorporation Relief?

Incorporation relief is a Capital Gains Tax deferral available when you transfer a business and all its assets into a limited company in exchange for shares in that company. Instead of paying CGT immediately on the gain, the tax is deferred until you later sell or dispose of those shares.

The relief is governed by Section 162 of the Taxation of Chargeable Gains Act 1992. It effectively allows you to roll over your gains into the shares you receive from the company, so you do not have to pay tax at the time of incorporation.

How Incorporation Relief Works

When you transfer a business to a company:

  1. HMRC treats this as if you sold the assets at market value.

  2. Normally, you would owe CGT on any gain from this disposal.

  3. With incorporation relief, that gain is deferred and built into the cost of your shares.

This means you only pay CGT if and when you sell your shares in the company. If you keep the shares indefinitely, the tax remains deferred.

Example

Suppose Jane owns four rental properties with a combined value of £1 million. The original cost was £700,000, so her potential capital gain is £300,000.

If she transfers the portfolio into a company and receives shares worth £1 million in return, she would normally owe CGT on £300,000. However, if her property letting qualifies as a business, incorporation relief allows her to roll over the £300,000 gain into the shares.

Her shares will have a base cost of £700,000 (£1,000,000 £300,000 gain), meaning the CGT is deferred until she eventually sells the shares.

When Property Owners Can Claim Incorporation Relief

Not all landlords qualify for incorporation relief. HMRC only grants the relief if the property activity is classed as a business rather than a passive investment.

To qualify, you must:

  • Transfer the whole business (not just one property) to the company.

  • Receive shares in the company as payment for the transfer.

  • Be running a genuine property business that involves significant activity.

This distinction between a property business and an investment is crucial.

When a Property Business Qualifies

A property business is more likely to qualify if you are actively involved in the day-to-day running of your portfolio. Factors HMRC considers include:

  • The number of properties owned.

  • The amount of time spent managing them.

  • Whether you handle maintenance, repairs, and tenant relations personally.

  • Whether property management is your main source of income.

There is no fixed threshold, but case law provides guidance. In Ramsay v HMRC (2013), the Upper Tribunal ruled that Mrs Ramsay’s letting activity qualified as a business because she spent around 20 hours per week managing multiple properties and was deeply involved in the operation.

When a Property Business Does Not Qualify

If you simply own one or two properties and use an agent to manage them, HMRC is unlikely to consider your activity a business. In that case, incorporation relief would not apply, and you would have to pay CGT on any gains at the point of transfer.

Similarly, if you transfer only part of your property portfolio or do not receive shares in exchange, you will not qualify for the relief.

Other Taxes to Consider When Incorporating

Even if you qualify for incorporation relief, you must still consider other taxes that may apply when transferring properties into a company:

  • Stamp Duty Land Tax (SDLT): The company must pay SDLT on the market value of the properties transferred, unless a partnership structure qualifies for relief.

  • Income Tax: If you withdraw money from the company later, dividends or salaries may be taxed personally.

  • Corporation Tax: The company will pay tax on rental profits, although the rate is usually lower than higher-rate personal Income Tax.

It is important to calculate the overall tax position before incorporating.

How to Claim Incorporation Relief

There is no separate form to apply for incorporation relief. It is claimed automatically when you report the transfer in your Self Assessment tax return, provided the transaction meets the qualifying conditions.

You should include:

  • Details of the business and assets transferred.

  • The value of the shares received.

  • The deferred capital gain.

HMRC may request evidence to show that your property activities constitute a business, such as:

  • Number and type of properties owned.

  • Hours spent managing them each week.

  • Records of repairs, maintenance, and tenant interactions.

If you are unsure whether you qualify, it is best to seek written confirmation from HMRC or consult a professional accountant before transferring your properties.

Example of a Non-Qualifying Case

John owns two buy-to-let flats managed by a letting agent. He spends very little time managing the properties himself. When he transfers them to a company, HMRC views his activity as passive investment rather than a business.

As a result, John cannot claim incorporation relief and must pay CGT on the gains immediately.

Benefits of Incorporation Relief

If you qualify, incorporation relief offers several advantages:

  • Defers Capital Gains Tax: You do not pay CGT at the time of incorporation.

  • Improves cash flow: You can move properties into a company without triggering a large tax bill upfront.

  • Supports long-term planning: The company structure may reduce future tax on rental profits and make inheritance planning easier.

  • Allows reinvestment: Profits can stay within the company and be reinvested into new property purchases.

The Role of an Accountant

Incorporation relief can save substantial amounts of tax, but the rules are complex. An accountant or tax adviser can help you:

  • Assess whether your property activity qualifies as a business.

  • Calculate potential gains and deferred tax.

  • Structure the transfer to minimise other taxes such as SDLT.

  • Ensure the transaction is correctly recorded and reported.

Professional advice is essential before transferring properties, as mistakes can lead to unexpected tax liabilities.

Conclusion

Incorporation relief allows landlords to transfer their property business into a limited company without paying Capital Gains Tax immediately. It can be a valuable tool for landlords managing active property businesses, but it only applies where the letting activity qualifies as a genuine trade.

Before incorporating, carefully assess whether your portfolio meets HMRC’s criteria and seek professional advice to ensure you benefit fully from the relief. Proper planning can make the process tax efficient and support the long-term growth of your property business.