When to Elect Out of Incorporation Relief Under Section 162

Section 162 incorporation relief is usually framed as the prize: transfer a qualifying property business into a company and the capital gain that would otherwise crystallise is rolled into the base cost of the shares, deferring the tax. But deferral is not the same as cancellation, and there are cases where a landlord is better off not relieving the gain at all. This piece closes the Section 162 cluster by looking at when electing out, or simply not claiming, is the right call. It builds on why the relief is no longer automatic from April 2026 and the CGT risk when a claim fails.

What electing out actually means

Historically, Section 162 relief applied automatically where the conditions were met, and a landlord who wanted the gain to crystallise instead had to make an election to disapply it under Section 162A of the Taxation of Chargeable Gains Act 1992. That election is irrevocable and time-limited. From 6 April 2026 the picture shifts: the Budget confirmed that the relief is no longer given automatically and has to be actively claimed with evidence that the business test is met. In the new regime, "electing out" is in practice a decision not to claim, but the underlying judgement is the same one, namely whether deferring the gain is genuinely worth more than crystallising it now.

Why deferral is not always the best outcome

Incorporation relief defers the gain by reducing the base cost of the shares the landlord receives in the company. That lower base cost means a larger gain later, whenever the shares are eventually sold or the company is wound up. The relief therefore moves tax into the future rather than removing it. Whether that is a good trade depends on the size of the gain, the reliefs available now, and what the landlord intends to do with the company.

When electing out can be the cheaper answer

• The gain is small enough to be covered, wholly or largely, by the annual exempt amount, so crystallising it now costs little or nothing.
• Capital losses are available to set against the gain, which would otherwise be wasted if the gain were rolled over.
• A higher base cost in the shares is worth more than the deferral, for example where a sale of the company or shares is realistically in view.
• The landlord expects their capital gains position or rates to be worse in the future than now, so banking the gain at today's rates is attractive.
• The portfolio gain is modest and the priority is a clean base cost in the company rather than a deferred liability hanging over a future disposal.

The residential capital gains rates are central to the arithmetic. Since 6 April 2024 the higher rate on residential property gains has been 24%, with 18% applying to the extent a person's gains fall within the basic-rate band. A landlord weighing a crystallised gain is comparing tax at those rates now against a larger deferred gain taxed at whatever rates apply when the shares are eventually sold.

A worked example

Consider a landlord incorporating a small portfolio with a total gain of £40,000 across the properties, who has £15,000 of unused capital losses from a previous disposal and an annual exempt amount available. Rolling the whole gain into the shares defers £40,000 but pushes a larger gain into the future and wastes the losses. Crystallising the gain instead uses the losses and the annual exempt amount against it, taxing only the balance at residential rates now, and leaves the company holding the properties at full base cost. For a landlord who may sell the company or specific properties within a few years, the higher base cost can be worth more than the deferral that was given up.

The mechanics and the time limit

Where the s162A disapplication election is used, it must be made within the statutory window, broadly two years from the 31 January following the tax year of the transfer, and it is shortened where the shares received on incorporation are disposed of before then. The election is irrevocable, so it cannot be reversed if circumstances change. Under the post-April-2026 active-claim regime, the equivalent decision not to claim is made on the relevant return, and the same care applies: the supporting position needs to be settled before the return is filed, not revisited afterwards.

The SDLT and lender picture still applies

Electing out of incorporation relief changes the capital gains treatment, not the rest of the transaction. The stamp duty land tax position on transferring property into the company, and the refinancing of any existing mortgages, are unaffected by the CGT election and still have to be worked through. Those issues are covered in the SDLT traps piece and the mortgages piece, and the valuation that drives every figure is dealt with in the portfolio valuation piece.

Common questions about electing out

Is electing out the same as failing the business test?

No. Electing out, or choosing not to claim, is a deliberate decision to crystallise the gain where the relief would otherwise be available. Failing the business test means the relief is not available at all. Both end in a crystallised gain, but one is a choice and the other is a denial, and the consequences for an unprepared landlord are very different.

Can I change my mind after electing out?

No. The s162A election is irrevocable, and a decision not to claim on a filed return is not something to unwind casually. That is why the decision should be modelled and settled before the return or election is finalised.

Why would I ever pay tax now if I could defer it?

Because deferral creates a larger gain later and can waste current losses and allowances. If the gain is small, losses are available, or a higher base cost is worth more to your exit plan, paying a modest amount now can be cheaper than a bigger deferred bill later.

Does the April 2026 change make electing out more relevant?

Yes. Now that the relief must be actively claimed with evidence, more landlords will be weighing whether to claim at all. For some, not claiming and crystallising a manageable gain will be the cleaner, cheaper route than defending a claim and carrying a deferred liability.