Why Goodwill Tax Treatment Matters for Solicitors Selling a Practice

When you sell your law firm, the largest asset on the balance sheet is often not the office furniture or the IT equipment. It is the goodwill. For a solicitor, goodwill represents the intangible value of your client relationships, your firm's reputation, and the expectation that those clients will continue to instruct the practice after you leave.

HMRC treats goodwill as a capital asset, not trading income. That distinction is critical. It means the proceeds from selling goodwill are subject to Capital Gains Tax (CGT), not income tax. For a solicitor selling a partnership or LLP interest, the tax rate on that gain can be as low as 14% under Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs' Relief.

But the rules are not straightforward. The relief conditions are strict, and the tax treatment depends on how your firm is structured, when the goodwill was created, and whether you are selling the entire practice or just your share. This article explains the key principles for UK solicitors.

What Is Goodwill in a Law Firm Context?

Goodwill is the premium a buyer pays for the right to take over your practice and continue trading under your firm's name. In a law firm, goodwill typically includes:

  • Ongoing client relationships and recurring instructions
  • The firm's brand and reputation in a specific legal market (conveyancing, litigation, family law, etc.)
  • Referral networks with other professionals
  • Work in progress (WIP) that will convert to billed fees post-completion

HMRC distinguishes between personal goodwill (attached to an individual solicitor) and practice goodwill (attached to the firm as a whole). Personal goodwill is harder to sell because it depends on the individual solicitor remaining involved. Practice goodwill is more valuable because it is transferable to a new owner.

For tax purposes, goodwill is a chargeable asset. Disposing of it triggers a capital gain equal to the sale proceeds minus the original cost (if acquired) or the market value at the date the firm was established (if created organically).

Capital Disposal: Goodwill Is Not Trading Income

One of the most common mistakes solicitors make is treating goodwill proceeds as part of their trading profit. That is wrong. Goodwill is a capital disposal, not revenue. It should be reported on your self-assessment tax return in the capital gains pages, not the trading profit pages.

If you are a partner in a law firm and you sell your entire partnership share, the gain on the goodwill element is calculated separately from the gain on other assets (such as property or equipment). The total gain is then subject to CGT at the appropriate rate.

For the 2025/26 tax year, the CGT rates are:

  • 18% for basic-rate taxpayers
  • 24% for higher-rate and additional-rate taxpayers

If you qualify for BADR, the rate drops to 14% in 2025/26. From 6 April 2026, the BADR rate rises to 18%. That change was confirmed in the Autumn Budget 2024, so if you are planning a sale, the timing matters.

BADR (Business Asset Disposal Relief) for Solicitors

BADR is the most valuable relief available to a solicitor selling a law firm. It reduces the CGT rate on qualifying gains to 14% (2025/26) or 18% (from 2026/27). The lifetime limit is £1 million of gains. Gains above that limit are taxed at the normal CGT rates.

To qualify for BADR on goodwill, you must meet all of the following conditions:

  • You have been a partner (or member of an LLP) in the firm for at least two years before the disposal
  • The firm is a trading business (a law firm qualifies as trading)
  • You are disposing of your entire interest in the firm, or at least a significant part of it
  • The goodwill is part of the business assets being sold

If you are a salaried partner who is treated as an employee for tax purposes under the Salaried Member Rules (FA 2014), you may not qualify for BADR. HMRC takes the view that a salaried member does not have a genuine economic interest in the firm's assets. You should check your partnership deed and tax status before assuming relief is available.

For equity partners and fixed-share partners who are genuinely self-employed for tax, BADR is usually available, provided the two-year holding period is satisfied.

Example: BADR Calculation for a Solicitor

Sarah is an equity partner in a three-partner conveyancing firm. She sells her 33% share for £600,000. The goodwill element of that share is valued at £400,000. She has held her partnership interest for eight years. Her total gain is £400,000 (assuming no base cost). She claims BADR on the full gain. Her CGT bill is £400,000 x 14% = £56,000. Without BADR, the bill would be £400,000 x 24% = £96,000. The relief saves her £40,000.

Section 162 Incorporation Relief

If you are transferring your law firm into a limited company structure (for example, converting a partnership into an ABS), you may be able to claim section 162 incorporation relief. This relief defers the CGT on the goodwill disposal until you sell your shares in the new company.

Section 162 applies when you transfer a business as a going concern to a company in exchange for shares. The gain on the goodwill is rolled over into the base cost of the shares. You do not pay CGT at the time of incorporation. Instead, you pay it when you sell the shares later.

This is useful if you plan to hold the company for several years and then sell the shares, potentially qualifying for BADR on the share disposal as well. However, the rules are complex. You must transfer all the assets of the business (or substantially all) to the company. You must also receive shares as consideration, not cash.

If you take cash out of the business at the time of incorporation (for example, by retaining some goodwill or extracting cash from the company), the relief is restricted. HMRC will treat part of the gain as chargeable immediately.

Example: Section 162 Relief for a Law Firm

James runs a sole-practitioner litigation practice. He incorporates the practice into a limited company (an ABS). The goodwill is valued at £250,000. He receives 100% of the shares in the new company as consideration. He claims section 162 relief. The £250,000 gain is deferred. He holds the shares for five years and then sells them for £500,000. The gain on the share sale is £500,000 minus the deferred gain of £250,000 = £250,000. He claims BADR on that gain, paying 14% (or 18% depending on the tax year).

Goodwill Amortisation: A Trap for Buyers

If you are buying a law firm, you need to understand the tax treatment of goodwill amortisation. Since 8 July 2015, HMRC has restricted tax relief on goodwill acquired from a related party. For goodwill acquired between 8 July 2015 and 31 March 2019, no amortisation relief was available at all.

For goodwill acquired on or after 1 April 2019, you can claim amortisation relief at 6.5% per year on a straight-line basis. This applies to goodwill acquired from an unconnected third party. If you buy a law firm from an existing partner who is also a shareholder in the buying company, the related-party rules may apply.

This is a common issue when a partnership incorporates into an ABS. The partners sell the goodwill to the new company. Because the partners are also the shareholders of the company, HMRC treats them as related parties. No amortisation relief is available on that goodwill. The company pays tax on its profits without deducting the goodwill cost.

If you are advising a client on buying a law firm, or if you are buying one yourself, always check whether the goodwill amortisation is deductible. The answer depends on the relationship between the buyer and seller.

Practical Steps for Solicitors Selling a Law Firm

If you are planning to sell your law firm, take these steps to optimise the tax treatment of goodwill:

  • Get a professional valuation. Goodwill must be valued by a qualified valuer. HMRC will challenge an unsupported figure. A valuation report from a firm specialising in legal practice valuations is essential.
  • Check your partnership deed. Some deeds specify how goodwill is allocated between partners on retirement or sale. Make sure the deed reflects your intentions.
  • Plan the timing. If you can complete the sale before 6 April 2026, you benefit from the 14% BADR rate. After that date, the rate rises to 18%.
  • Consider incorporation. If you plan to continue working, incorporating the practice and claiming section 162 relief may defer the tax bill. But weigh the ongoing corporation tax and dividend tax costs against the CGT saving.
  • Review your WIP. Work in progress is not goodwill. It is taxed as trading income when billed. Make sure the sale agreement clearly separates goodwill from WIP and other current assets.

Common Pitfalls to Avoid

Solicitors often make these mistakes when selling a law firm:

  • Treating goodwill as income. Report it as a capital disposal, not trading profit. If you report it as income, you pay income tax at up to 45%, plus NIC. That is far worse than CGT.
  • Missing the BADR conditions. If you have not held the partnership interest for two years, or if you are a salaried partner, you may not qualify. Check before you sign the sale agreement.
  • Ignoring the related-party rules. If you sell goodwill to a company you control, no amortisation relief is available. The company pays more tax as a result.
  • Forgetting about the annual exempt amount. You have a CGT annual exempt amount of £3,000 in 2025/26. If your gain is small, you may not owe any tax. But for most law firm sales, the gain will far exceed this threshold.

How a Solicitor Accountant Can Help

The tax treatment of goodwill on a law firm sale is one of the most complex areas of legal practice accounting. The interaction between CGT, BADR, section 162 relief, and the amortisation rules requires careful planning. A solicitor accountant who specialises in legal practices can help you structure the sale to minimise tax, ensure compliance with HMRC, and avoid costly mistakes.

We work with equity partners, fixed-share partners, and sole practitioners across England and Wales. If you are considering selling your law firm, book a practice valuation consultation or contact our team for a confidential discussion.