Turning Sole Trader into Ltd: How to Use Incorporation Relief & Director’s Loans to Maximise Tax Efficiency

Transferring your sole trader or partnership business into a limited company can be a game-changing step — but do it wrong, and you could land yourself a massive Capital Gains Tax bill. Do it right, and you’ll defer tax, boost your cash flow, and set yourself up for long-term savings.

In this blog, we’ll walk you through:

• What Incorporation Relief is
• How to use a Director’s Loan Account (DLA) cleverly
• The tax traps to avoid
• A simple strategy to have your cake and eat it (legally, of course)

So, What’s Incorporation Relief?

Let’s say you’ve built a business worth £300,000. You’re moving it into a limited company you fully control. Normally, HMRC would treat that as if you sold your business to the company — triggering Capital Gains Tax (CGT) on any rise in value, especially on goodwill.

But Incorporation Relief saves the day.

If you:

• Transfer your business as a going concern (i.e., an actual trading business),
• Transfer all assets (excluding cash, which is optional),
• Receive only shares in return (not cash or loans),

…then you automatically qualify for full Incorporation Relief.

This means: The CGT is postponed. The gain is “rolled into” the value of your shares. You only pay the tax when you eventually sell those shares — maybe years down the line, or never.

What if You Want Some Cash Now?

Here’s the twist: many business owners want some of the value back in their pocket upfront. That’s where the Director’s Loan Account (DLA) comes in.

If your business is worth £300,000 and you issue yourself £300,000 in shares, you’ll defer all CGT — but you’ve also tied up that full value in shares. To access cash, you’d need dividends or a salary, both of which are taxable.

Instead, what if you did this:

• Issue yourself £250,000 in shares (which covers the capital gain),
• Credit the remaining £50,000 to a Director’s Loan Account.

Now you still get full Incorporation Relief, but you’ve got a £50,000 tax-free pot to draw from whenever the company can afford to repay it.

Case Study: The Good vs the Ouch

Bad Example

• Business value: £300,000
• Cost base: £50,000 → Gain = £250,000
• Shares issued: £100,000
• DLA created: £200,000

CGT is triggered immediately on the £150,000 gain not covered by shares. Painful.

Good Example

• Shares issued: £250,000 (covers gain)
• DLA: £50,000 (surplus value)

Result: Full CGT deferral. Tax-free access to £50k via DLA. Everyone’s happy — except HMRC.

What Can You Transfer Into the Company?

Assets commonly moved into the company include:

• Goodwill (big one for CGT)
• Equipment, stock, vehicles
• Business property (though this triggers SDLT)
• Intellectual property
• Customer lists and branding

Stamp Duty Land Tax (SDLT) still applies to property transfers — Incorporation Relief doesn’t cover that. Same with VAT, unless it qualifies as a Transfer of a Going Concern (TOGC).

The Paperwork Bit (Yes, It Matters)

Don’t skimp here — HMRC can and will challenge dubious valuations. You’ll need:

• A formal Business Transfer Agreement
• Supporting asset valuations, especially goodwill
• Clear record of consideration split between shares and DLA
• Property title transfers (if relevant)
• Updated contracts, agreements, and records

Done right, you’re not just saving tax — you’re future-proofing the business.

Pro Tips to Keep You on the Right Side of the Taxman

✅ Shares must at least equal the gain to secure full Incorporation Relief.

✅ A DLA is brilliant for accessing funds tax-free — but don’t overdo it.

✅ Avoid inflating goodwill values unrealistically — HMRC has been auditing these more heavily.

✅ If your total gain is within the £6,000 CGT allowance, you might choose to opt out of Incorporation Relief and pay no CGT at all.

✅ Don’t forget to consider Business Asset Disposal Relief (BADR) — 10% CGT rate if you pay now instead of later.

Moving from sole trader to limited company is more than just a name change — it’s a legal and financial restructure. With the right balance of shares and a Director’s Loan Account, you can defer tax, improve cash flow, and stay in control.

But it must be done properly.

Get in touch with Helpbox today if you’re planning to incorporate. We’ll help you value your business, structure the transfer correctly, and keep the taxman at bay — so you can focus on growing, not worrying.