Incorporating a Trade or Property Business UK: Expert Tax Advice

Thinking about incorporating a trade or property business in the UK? You're not alone and it could be one of the most tax-efficient decisions you make. Whether you’re a sole trader, in a partnership, or running a property investment business, moving to a limited company structure can bring serious advantages but only with the right tax planning.

From Capital Gains Tax (CGT) to Incorporation Relief, Stamp Duty Land Tax (SDLT) and profit extraction methods, there’s a lot to consider. If done strategically, incorporation can help reduce tax liabilities, improve cash flow, and future-proof your business.

In this guide, we’ll break down everything you need to know about incorporating a trade or property business in the UK including expert insights, case studies, and actionable advice.

Table of Contents

• What Does Incorporating a Trade or Property Business in the UK Involve?

• Top Tax Benefits of Incorporating a UK Business

  • Sale vs Gift When Incorporating a Business: Tax Implications

  • Incorporation Relief for Trade and Property Businesses in the UK

• Tax and Cash Flow Changes When Incorporating Your Business

• Transferring Property When Incorporating a Property Business in the UK

• Legal Responsibilities & Limited Liability in Business Incorporation

• Goodwill and Corporation Tax Relief in Business Incorporation

• Capital Allowances When Incorporating a Trade or Property Business

• Tax - Efficient Profit Exteraction After Incorporation

• VAT Considerations When Incorporating a Business

• Admin Responsibilities After Incorporating a Business

• Case Study: Incorporating a Family Business for Significant Tax Savings

  • Background:

  • Our Intervention: 

  • Our Process:

  • The Outcome: 

• Conclusion 

• Next Steps: Get Expert Help on Business Incorporation in the UK

What Does Incorporating a Trade or Property Business in the UK Involve?

Incorporation refers to the process of forming a new company or transitioning an existing business into a corporate structure. For instance, a sole trader or a partnership may choose to trade under a company structure, offering a range of potential benefits but also imposing additional responsibilities and tax considerations.

Top Tax Benefits of Incorporating a UK Business

Businesses often consider incorporation for various reasons, including the desire to separate personal and business liabilities, optimise tax efficiency, and potentially create a more professional image. 

Here at ASWATAX, we’ve guided many clients (see recent case study below) through this process, and there are several key points to keep in mind when thinking about incorporation:

Sale vs Gift When Incorporating a Business: Tax Implications

One of the first decisions you’ll face is whether to sell or gift the business assets to the newly formed company. Each option involves distinct tax implications that you must carefully evaluate. For instance, selling the assets may result in a capital gains tax (CGT) liability, whereas gifting could affect the tax treatment differently. Additionally, you should carefully consider the impact on the Director’s Loan Account (DLA) and ensure you make any beneficial elections.

Incorporation Relief for Trade and Property Businesses in the UK

When transferring assets such as property or other significant items to the new company, a chargeable gain will most likely arise, leading to a CGT liability. However, Incorporation Relief can defer this liability, either wholly or partially, by rolling over the gain into the shares of the company. The availability of this relief depends on various factors, and it's crucial to seek tailored tax advice to fully understand how this could apply to your specific situation.

You must also satisfy key conditions.

Tax and Cash Flow Changes When Incorporating Your Business

As a sole trader, your profits are subject to Income Tax and Class 2 and 4 National Insurance Contributions (NICs). You must pay tax on total profits (since unincorporated structures are tax transparent), whether or not you need the funds.

Tax is payable no later than 31^st January following the end of the tax year. Don’t forget, additional payments on account both on the same date as well as 31^st July which becomes a bit of a headache for business owners, especially if better routes are available!

Upon incorporation, the tax landscape changes significantly. The company will now be liable for Corporation Tax, and you’ll need to consider the impact of Class 1 NICs on both the company and any salary you draw. You can extract income more tax-efficiently through dividends, but you must plan strategically to minimise overall tax liabilities. Moreover, utilising family members such as a spouse or children can provide additional benefit.

Trade and Property Tax Tips

Transferring Property When Incorporating a Property Business in the UK

If your business owns property, transferring it to the company can trigger Stamp Duty Land Tax (SDLT) liabilities. However, keeping the property in personal ownership while allowing the company to use it may provide an alternative income stream, though this could limit future tax reliefs such as Business Asset Disposal Relief. You should carefully weigh the decision to transfer or retain property, considering both tax and commercial implications.

We would proactively advise if such circumstances were to arise, whilst bringing about maximum tax benefit whilst also achieving yours and your family’s wider objectives.

Legal Responsibilities & Limited Liability in Business Incorporation

One of the main reasons people choose to incorporate is to gain limited liability, which generally protects their personal assets if the business incurs debts. However, you can’t always rely on this protection. If you provide personal guarantees to lenders or breach fiduciary duties, you risk piercing the "corporate veil" and exposing your personal assets. To fully understand the extent and limits of this protection, you should seek legal advice.

Goodwill and Corporation Tax Relief in Business Incorporation

Goodwill—the value of your business's reputation and customer base—can be a significant asset. However, Corporation Tax relief on goodwill is restricted, which may affect the overall cost of incorporation. Understanding these restrictions and their implications on your business finances is essential before proceeding.

Capital Allowances When Incorporating a Trade or Property Business

Incorporating your business involves transferring assets, which can lead to adjustments in capital allowances. For example, balancing adjustments may arise, and allowances such as the Annual Investment Allowance (AIA) and First Year Allowances may not be available on transferred assets. Beneficial elections can be explored to manage these adjustments and work in your favour, essentially optimising your personal tax position and the tax position of the new company.

Tax - Efficient Profit Exteraction After Incorporation

Operating through a company opens up various methods for extracting profits in a tax-efficient manner. Dividends, rental income from company-owned property, and interest on loans to the company are some ways to optimise tax efficiency.

I have identified TEN tax-efficient profit extraction methods and more details can be found on my videos and webinars. I shall write up a blogpost about it in the near future perhaps!

Additionally, involving family members in the business, provided they contribute meaningfully and receive reasonable compensation, can further enhance tax planning strategies.

VAT Considerations When Incorporating a Business

Incorporation might also involve VAT considerations, particularly if your business is VAT-registered. The transfer of a going concern may be exempt from VAT, but certain conditions must be met, and complications can arise, especially if an option to tax has been made. Professional advice is crucial to navigate these complexities and ensure compliance.

Admin Responsibilities After Incorporating a Business

Incorporating a business introduces new administrative responsibilities, such as filing annual accounts and confirmation statements with Companies House, maintaining statutory records, and ensuring compliance with corporate governance standards. These additional obligations require time and resources, so it’s important to be prepared for the increased compliance burden.

Case Study: Incorporating a Family Business for Significant Tax Savings

Background:

A father and daughter were successfully running a funeral business with an annual turnover of over £1 million. Despite their business success, completely dominating the market in their part of London after the father incorporated the business back in the 80s, they were each facing significant (and unnecessary) tax burdens, as their individual profits to be declared on their self-assessments were exceeding £150,000 per year, pushing them into the highest tax brackets. An unpleasant sight after seeing the tax liability on an annual basis.

This had been going on for years, but their previous accountants had never addressed the issue, leading to significant, unnecessary tax payments.

Our Intervention:

When the father and daughter came to us - initially for us to advise on the father’s looming inheritance tax liability (his estate value was in excess of £3m with a mix of shares, property both in the UK and overseas and cash) - it was immediately clear that there was a better way forward. After a thorough review of their business structure and tax position, and the detailed comparative calculations we walked through with the clients, we identified that incorporating the business could offer substantial tax savings, both now and in the future.

Our Process:

1. In-Depth Review and Calculation: We started by analysing the financial details and tax implications of their current setup. Our calculations showed that incorporating the business would provide immediate and long-term tax benefits, making it an obvious choice.

2. Legal and Financial Execution: With the decision made, we took charge of the entire process. We worked closely with legal experts to draft the necessary documents and managed the transfer of business assets.

3. Inheritance Tax Planning Whilst We’re At It!: An additional element identified was the potential to carefully divide one of the properties, owned by the father personally, valued at the time at £1.125m. We instructed lawyers to split the property into two separate deeds.
   

The commercial element was transferred to the newly formed company upon incorporation, while the daughter retained the residential part as she lived there with her family. This allowed them to benefit from Business Property Relief (BPR) on the commercial property. Another ‘regular’ win for us, but massive for our clients.

1. No Tax on Dividends!?: During incorporation, the father became a non-UK resident, giving him the opportunity to extract dividends completely tax-free under the disregarded income route. This means that he can extract unlimited levels of dividends without paying a single penny in UK tax! Small difference compared to the 45% he was previously paying. Lol. Get the sarcasm.
   

The Outcome:

As a result of these changes, the family is now saving around £60,000 per year in taxes. These savings were immediately evident in their 2023-24 tax return, demonstrating the effectiveness of our approach. The father and daughter were so pleased with the outcome that they have engaged us for ongoing services, recognising the value we bring to their business, and quite importantly for me personally, recognising how we always have our clients’ BEST interests at heart. The daughter has an interest in another similar trade with her husband, and we are exploring planning there. SSAS pension funds seems like one of the other logical steps forward to reduce their corporation tax bill on an annual basis.

Conclusion

This case highlights the power of reaching out to expert tax advisors and the difference we can make, usually in a very short space of time. By rethinking their business structure and guiding them through incorporation, we helped the father and daughter not only reduce their tax burden but also position their business for continued success. The benefits were immediate and substantial, allowing them to keep more of their hard-earned profits and reinvest in the future of their business.

Next Steps: Get Expert Help on Business Incorporation in the UK

If you’re considering incorporating your business, it's vital to seek professional advice tailored to your specific circumstances. All our work is bespoke.

At ASWATAX, our team is ready to assist you, VIP style. We want to understand your circumstances well and work closely with you to help achieve your objectives in a tax-efficient manner. We will ensure that the incorporation process is handled smoothly and efficiently. Please note that we undertake property business incorporations too on a regular basis.

Contact us today to discuss how we can help you make the best decision for your business's future.

Meet Omar Omar is a Chartered Tax Advisor (a.k.a an expert on tax issues) and founder of ASWATAX. He regularly shares his knowledge and best advice here in his blog and on other channels such as LinkedIn. Book a call today to learn more about what Omar and ASWATAX can do for you.