Why the Sale Structure Matters for Solicitors

When you sell a UK law firm, the transaction structure determines how much tax you pay, what liabilities the buyer inherits, and how the SRA handles the change of ownership. The two main options are an asset sale and a share sale. Each has distinct consequences for the seller, the buyer, and the firm's ongoing regulatory status.

This article explains the differences for solicitors and law firm partners. It focuses on the tax treatment, buyer preference, and practical SRA considerations. If you are planning an exit, you need to understand which structure aligns with your goals before you begin negotiations.

For a broader overview of practice valuation methods, see our practice valuation services page.

What Is an Asset Sale for a Law Firm?

In an asset sale, the buyer purchases individual assets and liabilities of the law firm. The selling entity (whether a partnership, LLP, or limited company) retains ownership of the legal entity itself. After the sale, the seller typically winds down the entity or dissolves it.

Typical assets sold include:

  • Goodwill (the firm's reputation, client relationships, and referral network)
  • Work in progress (WIP) and unbilled disbursements
  • Fixed assets such as office furniture, IT equipment, and leasehold improvements
  • Contracts with suppliers and service providers
  • Client files and ongoing matters (subject to client consent under SRA rules)

Liabilities are usually excluded unless specifically agreed. The buyer does not inherit historic debts, tax liabilities, or professional negligence claims from before the sale date. This is a key advantage for buyers.

Tax Treatment for the Seller in an Asset Sale

For a seller who is a solicitor partner in a partnership or LLP, the disposal of goodwill and other capital assets triggers a capital gain. The gain is subject to Capital Gains Tax (CGT) at the seller's marginal rate. In 2025/26, the CGT rates for individuals are 18% (basic rate) and 24% (higher rate).

Business Asset Disposal Relief (BADR) may apply. BADR reduces the CGT rate to 14% in 2025/26, rising to 18% from 6 April 2026. The lifetime limit is £1 million of gains. To qualify, the seller must have been a partner or LLP member for at least two years before the sale. The asset must be used in the trade.

For a solicitor selling their practice as a going concern, goodwill is typically the largest capital asset. BADR can save tens of thousands of pounds in tax. However, the relief is limited per individual, so partners in a multi-partner firm must allocate the £1 million limit carefully.

WIP and debtors are usually treated as trading receipts, taxed as income at the seller's marginal rate. This can create a higher tax charge on those elements compared to goodwill.

Buyer Preference in an Asset Sale

Buyers generally prefer asset sales. The main reason is that the buyer acquires a clean entity with no inherited liabilities. The buyer can also obtain capital allowances on fixed assets and amortise goodwill for tax purposes.

Under current rules, goodwill acquired after 1 April 2019 qualifies for amortisation at 6.5% per year on a straight-line basis. This provides a tax deduction for the buyer over approximately 15 years. For a buyer paying £500,000 for goodwill, the annual deduction is £32,500, reducing taxable profits by that amount each year.

However, the buyer cannot amortise goodwill acquired between 8 July 2015 and 31 March 2019. If the seller acquired the firm in that window and is now selling, the buyer should check the acquisition date carefully.

What Is a Share Sale for a Law Firm?

In a share sale, the buyer purchases the shares of the company that owns the law firm. The legal entity itself continues unchanged. The buyer steps into the shoes of the previous shareholders. This structure is only available if the firm is incorporated as a limited company, including an Alternative Business Structure (ABS) regulated by the SRA.

For partnerships and LLPs, a share sale is not possible because those structures have no shares. The members' interests are sold through a change in membership or a dissolution and reformation. In practice, most law firm sales involving partnerships or LLPs use an asset sale structure.

Tax Treatment for the Seller in a Share Sale

For a solicitor selling shares in their law firm limited company, the disposal is a capital gain. The gain is the difference between the sale proceeds and the original cost of the shares. CGT applies at the same rates as for an asset sale: 18% or 24% in 2025/26.

BADR is also available for share sales, provided the seller has held at least 5% of the shares and voting rights for two years, and the company is a trading company. Most incorporated law firms meet this test. The £1 million lifetime limit applies here too.

One key difference: in a share sale, there is no separate tax charge on WIP or debtors. The buyer acquires the company with all its assets and liabilities intact. The seller pays CGT on the entire gain, not a mix of income and capital tax.

Buyer Preference in a Share Sale

Buyers are often less enthusiastic about share sales. The buyer inherits all historic liabilities, including tax debts, professional negligence claims, and any SRA compliance breaches. Due diligence must be thorough, and the buyer typically requires extensive warranties and indemnities from the seller.

For a law firm, the SRA's rules on change of control apply. The buyer must notify the SRA of any change in ownership or control of an ABS. The SRA may impose conditions or refuse the change if the buyer does not meet the fit and proper test. This adds regulatory risk to the transaction.

Additionally, the buyer cannot obtain capital allowances on fixed assets in a share sale because the company already owns them. Goodwill amortisation is also not available because the goodwill is already on the company's balance sheet. The buyer's tax deductions are limited to the existing asset base.

Comparing the Two Structures: Key Factors for Solicitors

Seller CGT and Overall Tax Position

For a solicitor selling a partnership or LLP interest, an asset sale is the only practical option. The seller pays CGT on goodwill and other capital assets, with BADR available. WIP and debtors are taxed as income, which can push the seller into a higher tax bracket.

For a solicitor selling shares in an incorporated firm, a share sale gives a single CGT charge on the entire gain. This can be simpler and may result in a lower overall tax bill if the firm has significant WIP and debtors. However, the buyer may demand a lower price to compensate for the inherited risks.

In both cases, the £1 million BADR limit is per individual. Partners in a multi-partner firm should plan the allocation of the relief to maximise tax savings. For example, if four partners each sell their share of a £2 million goodwill asset, each has a gain of £500,000, all within the BADR limit. If the goodwill is £5 million, each partner has a gain of £1.25 million, and the excess over £1 million is taxed at the full CGT rate.

Buyer Preference and Negotiating Power

Buyers almost always prefer asset sales. The clean break from historic liabilities is a strong incentive. In a competitive sale process, a seller offering an asset sale may achieve a higher price than one insisting on a share sale.

If the seller insists on a share sale, the buyer will typically reduce the purchase price to reflect the risk. The buyer may also require a retention or earn-out structure, where part of the price is paid later subject to the firm's performance or the absence of claims.

For a law firm buyer, the SRA's regulatory oversight adds another layer. The buyer must demonstrate that the firm's COLP and COFA arrangements remain compliant after the sale. If the seller's COFA has been lax, the buyer may inherit compliance issues. Our COFA compliance support service can help buyers assess and address these risks.

SRA and Regulatory Implications

The SRA's rules on change of ownership apply differently depending on the structure. In an asset sale, the buyer must apply for a new SRA authorisation or notify the SRA of a material change if the buyer already holds a licence. The seller's firm is wound down and its SRA authorisation is cancelled.

In a share sale of an ABS, the buyer must notify the SRA of the change in control. The SRA will assess whether the new owners are fit and proper. This can delay the transaction and add costs for legal and compliance advice.

For partnerships and LLPs, a change in membership (such as a partner retiring and a new partner joining) is not a sale of the entity itself. The firm continues, but the departing partner's share is bought out. This is often structured as a retirement or resignation rather than a sale, with different tax consequences. See our partnership vs LLP guide for more detail.

Practical Example: A Two-Partner Law Firm Sale

Consider a two-partner law firm structured as a partnership. The firm has goodwill valued at £800,000, WIP of £150,000, and fixed assets worth £50,000. The partners each own 50%.

In an asset sale, each partner's share of the goodwill is £400,000. Assuming BADR applies, the CGT at 14% is £56,000 per partner. The WIP of £75,000 per partner is taxed as income at 40%, giving a tax bill of £30,000 per partner. Total tax per partner: £86,000. Total tax for both: £172,000.

If the same firm were incorporated and sold via a share sale, the total consideration might be £1 million (goodwill £800,000, WIP £150,000, fixed assets £50,000). Each partner's share is £500,000. With BADR, the CGT is £70,000 per partner. Total tax for both: £140,000. The share sale saves £32,000 in tax, but the buyer may offer a lower price due to inherited risks.

This example shows why the structure matters. The seller must weigh the tax saving against the buyer's willingness to pay. A good accountant will model both scenarios before you enter negotiations.

Other Considerations for Solicitors

Professional Indemnity Insurance

In an asset sale, the seller remains liable for PII claims arising from work done before the sale. The seller must maintain run-off cover for at least six years after ceasing practice. The buyer's PII policy covers work done after the sale. In a share sale, the company's PII policy continues, and the buyer inherits the run-off risk. This can affect the buyer's premium. See our PII tax treatment guide for more.

Under the SRA Accounts Rules and the SRA Code of Conduct, client files cannot be transferred without client consent. In an asset sale, the buyer must contact each client and obtain their agreement to continue the matter. This can be time-consuming and may result in some clients choosing another firm. In a share sale, the firm continues, so client consent is not required for the sale itself, though ongoing matters still require client instructions.

VAT Implications

An asset sale of a law firm as a going concern may qualify as a Transfer of a Going Concern (TOGC) for VAT purposes. If the conditions are met, no VAT is charged on the sale. The buyer must be VAT-registered and intend to carry on the same type of business. A share sale is outside the scope of VAT. Both structures need careful VAT advice to avoid unexpected charges.

Which Structure Should You Choose?

There is no single right answer. The best structure depends on:

  • Whether the firm is a partnership, LLP, or limited company
  • The size and nature of the firm's assets and liabilities
  • The buyer's preference and negotiating position
  • The seller's CGT position and available reliefs
  • The SRA's regulatory requirements

For most partnership and LLP firms, an asset sale is the only viable option. For incorporated firms, a share sale may be possible but is often less attractive to buyers. The seller should enter negotiations with a clear understanding of the tax and regulatory consequences of each structure.

If you are considering selling your law firm, speak to a legal-sector-specialist accountant. They can model the tax outcomes, advise on BADR eligibility, and help you negotiate the best structure for your circumstances. Contact us through our contact page or book a free firm health check to start the conversation.