To incorporate sole trader businesses, owners set up a limited company and transfer the trade and its assets into it, usually in exchange for shares. Done properly, incorporation relief under section 162 of the Taxation of Chargeable Gains Act 1992 defers any capital gain on the goodwill and other assets, VAT is not charged if the move is a transfer of a going concern, and plant and machinery can move across without a balancing charge. It usually makes sense once your profits are well into the higher-rate band and you do not need to draw all of them.

This guide explains when it pays to incorporate sole trader businesses in 2026/27, how the main tax reliefs work, the goodwill traps, and the practical steps and timeline, with a worked example.

When does it make sense to incorporate sole trader businesses?

Choosing to incorporate sole trader businesses is not automatically cheaper. With dividend tax rates rising to 10.75% and 35.75% from April 2026, the tax saving on profits that you take out in full is now small at many profit levels. The case is strongest when:

• Your profits are in the higher-rate band and you can leave part of them in the company, where they are taxed at 19% to 25% corporation tax rather than up to 42% income tax and Class 4 NI.
• You want limited liability, for example because you take on larger contracts or employ staff.
• Customers or lenders prefer to deal with a company.
• You want to bring in investors or family shareholders, or plan to sell the business later.

Against this, when you incorporate sole trader businesses you take on more admin, public accounts at Companies House, payroll for directors and stricter rules on taking money out. Our guide to choosing between a sole trader and a limited company covers these factors in detail.

Tax reliefs when you incorporate sole trader businesses

Tax	Issue on incorporation	Main relief or rule
Capital Gains Tax	Transferring goodwill and assets is a disposal at market value	Section 162 incorporation relief, automatic if conditions are met
Business Asset Disposal Relief	Not available on goodwill sold to your own close company if you hold 5% or more	Usually rely on section 162 instead
Corporation tax	No deduction for goodwill bought from a related individual	Applies to most incorporations since April 2019
VAT	Sale of business assets could attract VAT	Transfer of a going concern (TOGC), no VAT charged
Capital allowances	Transfer could trigger a balancing charge	Joint election to transfer at tax written-down value
Stamp Duty Land Tax	Property transferred to a connected company	Charged on at least market value

Section 162 incorporation relief

Incorporation relief defers the capital gain arising when you incorporate sole trader businesses and transfer them to a company. It applies automatically, with no claim needed, if:

1. The business is transferred as a going concern.
2. All the assets of the business are transferred, although cash can be kept back.
3. The company pays for the business wholly or partly by issuing shares.

The gain is not taxed now. Instead, it reduces the base cost of your shares, so it is taxed only when you later sell the shares, potentially with Business Asset Disposal Relief at that point if you qualify. If part of the price is paid in cash or credited to a director’s loan account, only the share proportion of the gain is deferred and the rest is taxable now.

Because all assets must transfer, business property usually has to go into the company as well, which can trigger Stamp Duty Land Tax at market value. You can elect to disapply the relief, for example if your gain is small enough to be covered by the £3,000 annual exempt amount.

Goodwill rules

Goodwill is often the biggest asset in a sole trade, even though it does not appear on your balance sheet. Two rules limit the old planning of selling it to the company:

• No corporation tax relief: since April 2019, a company that acquires goodwill from a related individual on incorporation generally cannot deduct its cost for corporation tax.
• No Business Asset Disposal Relief: gains on goodwill transferred to a close company are excluded from the relief if you hold 5% or more of the company, so the gain is taxed at 18% or 24%.

Selling goodwill for a credit to your director’s loan account can still be worth considering, because you can later draw that balance tax-free. The valuation must be supportable, as HMRC can challenge an inflated figure.

Worked example: incorporating a Horwich joinery business

Daniel is one of many Bolton-area tradespeople looking to incorporate sole trader businesses. He has run a joinery business in Horwich for ten years. His goodwill is valued at £60,000, with no base cost, and his tools and equipment are worth £15,000 with no gain. He is a higher-rate taxpayer.

	Option A: all for shares	Option B: goodwill to loan account
Total consideration	£75,000 in shares	£15,000 shares, £60,000 loan account
Gain deferred by section 162	£60,000	£12,000
Gain taxable now	£0	£48,000
CGT now (after £3,000 exempt, at 24%)	£0	£10,800
Base cost of shares	£15,000	£3,000
Tax-free loan account to draw later	£0	£60,000

Under Option B, Daniel pays £10,800 now but can withdraw £60,000 from the company without further tax. Taking the same £60,000 as higher-rate dividends would cost £21,450 in dividend tax. Option A costs nothing now, but the gain is held over until he sells his shares. For anyone planning to incorporate sole trader businesses with valuable goodwill, the right answer depends on future plans and cash needs. The figures are illustrative and assume the valuation is accepted.

VAT: transfer of a going concern

If you are VAT-registered and the company carries on the same kind of business with the same assets, the transfer is a TOGC and no VAT is charged. The company must be VAT-registered, or become registered because of the transfer. You can ask to move your existing VAT number to the company, but the company then takes on any VAT debts of the sole trade, so check the position first.

Capital allowances

You and the company are connected, so you can make a joint election to transfer plant, machinery and vans at their tax written-down value. This avoids a balancing charge on your final sole trader return. The election must be made within two years of the transfer. See our guide to capital allowances.

Steps to incorporate sole trader businesses: a checklist

1. Get advice and model the numbers, including salary, dividends and the cost of running a company.
2. Value the goodwill and decide on shares versus loan account consideration.
3. Form the company at Companies House and set it up for corporation tax. Our company formation service handles this for you.
4. Agree a transfer date, ideally at a month end, and draw up a sale agreement listing the assets and liabilities transferred.
5. Open a company bank account and move over contracts, insurance, leases and supplier accounts.
6. Set up PAYE if you will pay a director’s salary or have staff.
7. Deal with VAT: register the company and decide whether to transfer the VAT number.
8. Tell HMRC you have stopped self-employment and file your final Self Assessment return, including profits up to the cessation date.
9. Make the capital allowances election within two years.

The timeline depends mostly on agreeing the goodwill valuation, opening the company bank account and moving customer and supplier contracts, so start planning well before the date you want the company to begin trading.

Frequently asked questions

Plan your incorporation with Cangaf

Deciding whether to incorporate sole trader businesses affects your tax for years to come, and the reliefs depend on getting the paperwork right first time. Cangaf’s ACCA-qualified team in Bolton provides business tax advice, models the numbers, values the options and manages every step of the transfer. Request a fixed-fee quote to get started.

Official guidance: HS276 Incorporation Relief, Transfer a business as a going concern (VAT Notice 700/9), Business Asset Disposal Relief and Capital Allowances Act 2001, section 266.