What Is Section 162 Incorporation Relief?

Section 162 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) provides relief from capital gains tax (CGT) when a person transfers their unincorporated business to a limited company in exchange for shares. For a dental principal who has built up goodwill in their practice over years or decades, this relief can defer a substantial CGT bill that would otherwise crystallise on incorporation.

The relief works by deferring the gain on the transfer of the business assets, including goodwill, until the dentist disposes of the shares received in the company. It is automatic if the conditions are met. You do not need to elect for it. But if you want to opt out (for example, to use up your annual CGT exempt amount), you must make a joint election with the company within two years of the transfer.

For a dental practice incorporation, the key asset is often goodwill. Goodwill on a practice sale can represent 60-80% of the total purchase price. Without relief, a dentist could face a CGT bill at 18% or 24% (depending on their other income and gains) on that gain immediately. Section 162 defers that liability.

When Does a Dental Principal Need This Relief?

You might be considering incorporation because you want to:

  • Protect personal assets from practice liabilities
  • Bring in a new partner or associate as a shareholder
  • Access more tax-efficient profit extraction (dividends versus self-employed profits)
  • Sell the practice more easily later (a company sale can be cleaner than a partnership sale)

If you currently trade as a sole trader or partnership and you transfer the whole business to a newly formed limited company, section 162 relief is relevant. The relief applies to the transfer of the entire business, not just selected assets. HMRC takes the view that the business must be transferred as a going concern.

A typical scenario: Dr Patel has run a mixed NHS-private practice as a sole trader for 15 years. The goodwill is worth £400,000. She wants to incorporate. Without relief, she would face CGT on the £400,000 gain (assuming no base cost) at 24% = £96,000. With section 162 relief, that gain is deferred until she sells her shares.

Conditions for Section 162 Relief on a Dental Practice

To qualify for relief, the following conditions must be satisfied:

  • Whole business transfer: You must transfer the entire business, not just some assets. You cannot cherry-pick. If you retain the freehold of the practice premises and lease it to the company, that may break the relief because the premises are part of the business.
  • Transfer to a company: The recipient must be a limited company (not an LLP or partnership).
  • Consideration wholly or partly in shares: You must receive shares in the company as part of the consideration. If you take cash instead of shares, the relief is restricted proportionally.
  • Business carried on as a going concern: The practice must be active at the point of transfer.

If you take some cash and some shares, the gain is apportioned. The deferred gain relates only to the share element. The cash element triggers an immediate CGT charge.

For example, if Dr Patel receives shares worth £300,000 and cash of £100,000 for goodwill worth £400,000, 75% of the gain is deferred (the share proportion) and 25% is immediately chargeable.

How the Relief Works in Practice

When you transfer your dental practice to the company, you compute the gain on each asset (goodwill, equipment, fixtures, premises if owned). The gain on the assets transferred for shares is not charged immediately. Instead, the base cost of the shares you receive is reduced by the amount of the deferred gain.

This means when you eventually sell the shares, the gain will be larger because the base cost is lower. The CGT is deferred, not eliminated. However, you may then qualify for Business Asset Disposal Relief (BADR) on the share sale, which gives a lower rate of 14% in 2025/26 (rising to 18% from 6 April 2026).

There is a technical point here. The share base cost adjustment under section 162 is different from the normal share acquisition cost. You should keep clear records of the original asset values and the deferred gain. Your dental accountant should prepare a schedule of the relief calculation at incorporation.

Interaction with Goodwill and Capital Allowances

Goodwill is often the largest asset in a dental practice incorporation. The relief under section 162 applies to goodwill just as it applies to equipment or premises. However, there are two important interactions to consider:

  • Goodwill amortisation in the company: If the company acquires goodwill after 1 April 2019, it can claim tax relief at 6.5% per year on the cost of qualifying goodwill (Finance Act 2019). This relief is available even though the dentist deferred the gain. The company gets a tax deduction; the dentist defers the CGT. This can be a powerful combination.
  • Capital allowances on fixtures: When you transfer equipment and fixtures (dental chairs, X-ray units, compressors, autoclaves), the company can claim capital allowances on the transfer value. You need a joint election under section 198 of the Capital Allowances Act 2001 to fix the value at which the assets transfer for capital allowances purposes. Without this election, the company may get less relief.

If you own the practice premises personally and plan to retain them, you cannot include the premises in the section 162 transfer. The relief requires the whole business to be transferred. Retaining the premises and leasing them to the company means you have not transferred the whole business. HMRC has historically challenged this. One solution is to transfer the premises to the company as part of the incorporation, but that triggers SDLT and potential CGT on the property element (though section 162 can apply to the property gain too if it is part of the business).

Alternatively, you can incorporate the practice without the premises and accept that section 162 relief will not apply to the goodwill and other assets. In that case, you would need to consider other reliefs or pay the CGT. This is a common area where dentists need specialist advice.

Common Pitfalls for Dental Principals

Several traps catch dentists out when incorporating:

  • Partial transfers: If you transfer only the goodwill and keep the equipment personally, or transfer only the NHS contract and not the private list, HMRC will argue the whole business was not transferred. Relief fails.
  • Cash consideration: Taking too much cash (or loan account credit) rather than shares can reduce or eliminate the relief. The relief is proportional to the share consideration.
  • Retaining the premises: As noted above, this is a common reason for relief being denied. If you must retain the property, consider whether incorporation is still the right move, or whether a different structure (such as a partnership with a corporate partner) might work better.
  • Missing the election to opt out: If you want to use your annual exempt amount (£3,000 in 2025/26) against part of the gain, you must make a joint election with the company within two years of the transfer. If you miss the deadline, the relief is automatic and you cannot use the exempt amount.
  • Valuation of goodwill: HMRC may challenge the goodwill valuation if it seems too high or too low. An overvaluation can lead to a higher deferred gain and a future CGT problem. An undervaluation can mean the company gets less amortisation relief. A professional valuation is essential.

Alternatives to Section 162 Relief

Section 162 is not the only option. Depending on your circumstances, you might consider:

  • Gift relief under section 165 TCGA 1992: This applies to gifts of business assets, including to a company. It can achieve a similar deferral but requires a joint election. It is less commonly used for incorporations because section 162 is automatic.
  • Incorporation without relief: If the gain is small enough to be covered by your annual exempt amount or if you have capital losses to use, you might choose to pay the CGT now and have a higher base cost in the company's assets (and therefore more amortisation relief).
  • Partnership with a corporate partner: Some dentists use a structure where a limited company becomes a partner in the practice partnership. This can achieve some of the benefits of incorporation without triggering a full disposal of goodwill. This is a complex area and requires bespoke advice.

For most dental principals with significant goodwill, section 162 relief is the most straightforward way to incorporate without an immediate tax bill. But it is not always the best option. A full comparison of the tax position before and after incorporation, including the impact on NHS Pension Scheme contributions, should be modelled before proceeding.

Practical Steps for a Dental Practice Incorporation

If you are considering incorporating your dental practice, follow these steps:

  1. Get a professional valuation of the practice goodwill and assets. This is critical for the relief calculation and for the company's future amortisation claims.
  2. Decide whether to include the premises. If you own the freehold, weigh the SDLT cost of transferring it against the loss of section 162 relief if you retain it.
  3. Agree the share structure. Will you be the sole shareholder? Will associates or partners take shares? The relief applies per transferor.
  4. Prepare a business transfer agreement. This should list all assets being transferred and the consideration split between shares and cash.
  5. Complete the incorporation at Companies House. The company must be formed before the transfer takes place.
  6. Notify HMRC of the transfer. The company will need to register for corporation tax. You will need to finalise your sole trader accounts up to the date of transfer.
  7. Consider the section 198 election for capital allowances. This should be made within two years of the transfer.
  8. Review your NHS Pension Scheme position. Incorporation changes how you pay yourself and may affect your pensionable earnings. The NHS Pension Scheme has specific rules about director and shareholder drawings.

Each step has tax implications. A dental-specialist accountant can help you model the numbers and avoid the common pitfalls.

Summary

Section 162 incorporation relief is a valuable tool for dental principals who want to transfer their practice to a limited company without an immediate CGT charge. The relief is automatic if the whole business is transferred in exchange for shares. It defers the gain on goodwill and other assets until the shares are sold, at which point BADR may apply.

The main conditions are straightforward: the entire business must be transferred, the consideration must include shares, and the business must be a going concern. The traps are in the detail: retaining the premises, taking cash, or transferring only part of the business can all break the relief.

If you are thinking about incorporating your dental practice, start with a valuation and a conversation with a dental accountant who understands the specific rules for dental goodwill, NHS contracts, and the NHS Pension Scheme. The decision to incorporate should be based on a full financial model, not just tax deferral.

For more guidance on practice structure, see our guide to partnership versus limited company structures. If you are also considering a future sale, our goodwill valuation and sale playbook covers the exit side. For a full review of your practice finances, book a free practice health check.