Finance Act 1992 Section 130

Section 130 of the Finance Act 1992, primarily concerning capital gains tax, introduced significant changes to the taxation of gains arising from the disposal of assets, particularly those connected with business restructuring and incorporation relief. The key objective was to facilitate genuine commercial reorganizations without unduly penalizing businesses with immediate tax liabilities.

Prior to the enactment of Section 130, incorporating a sole trader or partnership into a limited company often triggered capital gains tax on the transfer of business assets to the new company. This could discourage businesses from formalizing their structure due to the immediate tax burden, even if the restructuring was commercially sound and aimed at long-term growth. The section sought to address this by providing for ‘incorporation relief’, allowing qualifying transfers to be treated in a more tax-efficient manner.

The core mechanism of Section 130 involved deferring the capital gains tax liability. Instead of immediately paying tax on the difference between the market value and the original cost of the assets transferred, the gain was essentially rolled over into the shares received in the new company. This was achieved by deeming the individual or partners to have acquired the shares at a cost equal to the original cost of the transferred assets. Consequently, the capital gains tax would only become payable when the shares themselves were eventually sold.

Several conditions had to be met to qualify for incorporation relief under Section 130. First, the business had to be transferred to a company wholly or partly in exchange for shares in that company. Crucially, the transfer had to represent the whole of the business, or the whole of the assets of the business, excluding cash, that were transferred. Furthermore, the shares received had to be issued to the person or persons who were carrying on the business before the incorporation. The consideration for the transfer had to consist wholly or partly of shares, although a small amount of cash could also be included, often to cover incidental expenses. If the consideration included anything other than shares, the relief was restricted proportionately.

The introduction of incorporation relief through Section 130 had a positive impact on the business environment. It made it more attractive for sole traders and partnerships to incorporate, leading to greater access to funding, improved business governance, and reduced personal liability for business debts. By deferring the capital gains tax liability, it freed up capital for reinvestment in the business, fostering growth and creating employment opportunities. While Section 130 has been amended and superseded by subsequent legislation, its core principles remain influential in the taxation of business reorganizations today, reflecting the enduring need to balance revenue collection with the promotion of economic activity.