Asset Sale vs Share Sale for a UK Law Firm: Who Can Do Which, and the Tax Difference

The First Question Is Not Asset or Share, It Is What Structure You Are

When a UK law firm changes hands, people reach quickly for the asset sale versus share sale comparison. For a solicitor, the more useful starting point is simpler: your firm's legal structure decides which routes are even available to you.

A partnership or an LLP has no shares. There is no share capital to transfer, so a share sale is impossible by definition. The only way to sell a partnership or LLP practice is an asset sale, also called a business sale, where the buyer acquires the firm's goodwill, work in progress, debtors and fixed assets, and each departing partner's capital account is settled. A share sale becomes an option only when the firm is incorporated as a limited company or an Alternative Business Structure (ABS), because only a company has shares.

So the real comparison runs along these lines. If you are a partnership or LLP, you are choosing how to run an asset sale well. If you are incorporated, you are choosing between an asset sale and a share sale, and weighing the tax and buyer-appetite trade-offs between them. If you are a partnership or LLP but want the share sale route open later, you are really asking whether to incorporate first. This article works through all three.

For how the firm itself is valued before any of this, see our law firm valuation guide and our practice valuation service.

What an Asset Sale Is for a Law Firm

In an asset sale the buyer purchases the individual assets and selected liabilities of the firm, not the legal entity. The selling entity (partnership, LLP or company) keeps its own legal identity, and after completion the seller usually winds it down. For a partnership or LLP this is the only available structure.

Assets typically transferred include:

• Goodwill: the firm's reputation, client relationships and referral network
• Work in progress (WIP) and unbilled disbursements
• Trade debtors (in some deals; often retained and collected by the seller instead)
• 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 stay with the seller unless specifically taken on. The buyer does not automatically inherit historic debts, prior tax liabilities or pre-completion professional negligence claims. That clean break is the main reason buyers tend to prefer asset deals.

Seller Tax in an Asset Sale: Split Capital From Income

For a solicitor selling a partnership or LLP interest, the single most important point is that the proceeds are not all taxed the same way.

Goodwill is a capital asset. The gain on goodwill is charged to Capital Gains Tax (CGT), not income tax, and goes on the capital gains pages. On most law firm sales goodwill is the largest single asset, so its treatment drives the overall tax bill.

WIP and debtors are trading income. When unbilled time and outstanding bills are sold or billed as a trading receipt, they are taxed at income tax rates plus Class 4 National Insurance, not at CGT rates, and they do not qualify for BADR. This matters because income tax can reach 40% or 45% at the margin, well above the CGT rates.

The practical consequence is that the sale agreement must split the consideration clearly between goodwill and fixed assets (capital) and WIP and debtors (income). A vague single price invites HMRC to tax more of the deal as income than the seller intended. For the detail on each element, see our goodwill tax treatment guide and our guide to WIP on a law firm sale.

Standard CGT Rates and the Annual Exempt Amount

Where BADR does not apply, an individual's capital gain (including a gain on goodwill) is taxed at 18% within the basic-rate band and 24% above it. These rates have applied to all chargeable assets since 30 October 2024, when the former 10% and 20% rates on non-residential assets were raised. The annual exempt amount is £3,000 for 2025/26 (and 2026/27), so only a small slice of any sale gain is tax free.

Business Asset Disposal Relief on an Asset Sale

BADR reduces the CGT rate on qualifying gains, up to a lifetime limit of £1 million per individual. The rate is on a rising schedule, so the date of disposal matters:

• 10% for disposals up to 5 April 2025
• 14% for disposals between 6 April 2025 and 5 April 2026
• 18% for disposals from 6 April 2026

For an asset sale, the qualifying test is that you are a genuine partner or LLP member disposing of the whole or part of the business, and you have carried on the trade throughout the two-year period ending on the date of disposal. A member who has been caught by the salaried member rules may struggle to show a genuine BADR-qualifying interest, so a fixed-share or salaried partner should check their position rather than assume the relief is available.

Because the rate steps from 14% to 18% on 6 April 2026, completion timing is now a live planning lever. A sale that completes in late 2025/26 rather than early 2026/27 can carry a materially lower BADR rate on the same gain, all else being equal.

Buyer Tax in an Asset Sale

Buyers like asset sales partly for the tax position. The buyer can claim capital allowances on qualifying fixed assets and, where the goodwill is acquired from a genuinely unconnected seller as part of a business that also includes qualifying intellectual property, may obtain fixed-rate relief on goodwill acquired on or after 1 April 2019 (subject to the statutory cap). There is no relief on goodwill that was acquired in the window 8 July 2015 to 31 March 2019, so the acquisition history is worth checking.

One trap deserves a flag. Where partners transfer their existing practice into their own new company (a self-incorporation), the goodwill is acquired from a related party, and the buyer-company relief on that goodwill is generally fully restricted. So a firm that incorporates itself should not assume the new company gets a goodwill deduction. That is different from a true third-party buyer, who may qualify.

What a Share Sale Is for a Law Firm

In a share sale the buyer purchases the shares of the company that owns the firm. The company carries on unchanged, and the buyer simply steps into the shoes of the previous shareholders. This route exists only where the firm is incorporated as a limited company or an ABS regulated by the SRA. For a partnership or LLP it is not available, because there are no shares to sell.

Seller Tax in a Share Sale

For a solicitor selling shares in their law firm company, the disposal is a single capital gain: sale proceeds less the original cost of the shares. CGT applies at the same standard rates as elsewhere, 18% or 24%, with BADR available on qualifying gains at the date-banded rates above.

For a share sale the BADR conditions are tighter than for an asset sale. Throughout the two-year period ending on disposal you must have held at least 5% of the ordinary share capital and at least 5% of the voting rights, been an officer or employee of the company, and been entitled to at least 5% of the economic value (broadly, profits available for distribution and the proceeds on a sale of the whole company). Most genuine owner-managers of a small incorporated firm meet this, but a thin or non-voting shareholding can fail it, so the share register and articles need checking well before a sale.

One structural advantage of a share sale is that there is no separate income tax charge on WIP or debtors. The buyer acquires the company with its assets and liabilities intact, so the whole gain is taxed as capital rather than split between capital and income. For a firm with large lock-up (high WIP and debtor days), that can reduce the seller's overall tax compared with an asset sale, where the WIP element is taxed as income.

Buyer Tax and Risk in a Share Sale

Buyers are usually warier of share sales. The buyer inherits the company's entire history: tax debts, pre-completion negligence claims, employment liabilities and any regulatory issues. Diligence has to be thorough, and the buyer will normally want extensive warranties and indemnities, and often a retention or earn-out, to manage that risk. The buyer also gets no fresh capital allowances or goodwill relief, because the company already owns its assets and the goodwill is already on its balance sheet.

For a regulated firm there is a further layer. On a change of control of a recognised body or ABS, the SRA must be notified and will assess whether the incoming owners and managers are fit and proper. That approval can take time and can delay or condition completion, which adds execution risk a buyer prices in.

Comparing the Two: What Actually Drives the Decision

Your Structure Comes First

The honest comparison is constrained by what you already are. A partnership or LLP simply cannot do a share sale, so for the great majority of law firms the live question is how to structure a clean asset sale, not asset versus share at all. Only an incorporated firm genuinely has both routes open, and even then buyer appetite often pushes toward an asset deal.

Seller Tax Position

For a partnership or LLP asset sale, you pay CGT on goodwill and fixed assets (with BADR where it applies) and income tax plus Class 4 NIC on WIP and debtors. For an incorporated firm, a share sale gives a single CGT charge on the whole gain, which can be simpler and, for a firm with significant WIP, lighter overall. But the buyer may pay less for a share deal to reflect the inherited risk, so a tax saving on paper can be offset by a lower headline price.

In every case the £1 million BADR limit is per individual. In a multi-partner firm the partners should plan how the relief is used across the group. If each partner's qualifying gain sits within their own £1 million limit, the whole gain can attract the BADR rate; gains above the limit, or gains that do not qualify, fall back to the standard 18% or 24%.

Buyer Appetite and Negotiating Power

Buyers generally favour asset sales for the clean break from historic liabilities, and in a competitive process a seller who can offer an asset deal may secure a stronger price than one insisting on a share sale. Where a share sale is the seller's preference, expect the buyer to seek a price adjustment, robust warranties, and a deferred or earn-out element tied to performance or the absence of claims.

For a law firm there is an extra dimension: the buyer will want comfort that the firm's compliance, including its COLP and COFA arrangements, holds up after completion. Weak finance compliance discovered in diligence can dent both price and certainty. Our COFA compliance support can help either side assess and tidy this before a deal.

SRA and Regulatory Implications

The regulatory path differs by structure. In an asset sale the buyer relies on its own SRA authorisation (or applies for one or notifies a material change), and the seller's entity is wound down and its authorisation cancelled. In a share sale of a recognised body or ABS, the SRA must be notified of the change of control and will run its fit-and-proper assessment of the new owners. For a partnership or LLP, a partner simply retiring and being bought out is a change in membership rather than a sale of the firm, and the firm continues; that is usually framed as a retirement, with its own tax treatment. Our partnership versus LLP guide covers the membership mechanics.

When to Incorporate First

If you run a partnership or LLP and want the option of a future share sale, or you simply expect a share sale to suit a planned buyer, the practice has to be incorporated first. That is a deliberate step with its own tax consequences, not an afterthought at sale.

The usual relief is incorporation relief under TCGA 1992 section 162. Where the whole business is transferred as a going concern to a company wholly or partly in exchange for shares, the gain on the transferred assets (including goodwill) can be deferred and rolled into the base cost of the new shares, rather than crystallising on incorporation. Taking cash out instead of shares restricts the relief in proportion. Incorporating this way can set up a later share sale that accesses BADR on the shares.

Two cautions. First, on a self-incorporation the company generally gets no goodwill relief, because the goodwill comes from a related party (covered above), so do not double-count a buyer-side deduction that will not exist. Second, incorporation must satisfy SRA authorisation: a company or ABS needs the right recognised-body or licensed-body status, so the regulatory route has to be planned alongside the tax. Our guides on converting an LLP to a company and whether to incorporate ahead of the 2026 dividend changes go deeper.

Worked Comparison: A Two-Partner Firm

The figures below are an illustration only, not advice on any particular firm. Take a two-partner practice carried on as a partnership, with goodwill valued at £800,000, WIP of £150,000 and fixed assets of £50,000, owned equally.

As an asset sale. Each partner's share of goodwill is £400,000. Assuming BADR applies at the 14% rate (a disposal in 2025/26), the CGT on goodwill is around £56,000 per partner. Each partner's £75,000 share of WIP is taxed as income; at a 40% marginal rate that is around £30,000 per partner. That points to roughly £86,000 of tax per partner on these elements, before reliefs and the annual exempt amount are applied.

As a share sale, if the firm were incorporated. Suppose the same business were sold for £1 million of shares. Each partner's gain is broadly £500,000, all taxed as capital. With BADR at 14% that is around £70,000 per partner, with no separate income charge on WIP. On these illustrative numbers the share route looks lighter on tax, but the buyer may discount the price for the risks they inherit, which can erase the apparent saving.

The point of the example is not the precise numbers, which depend on base cost, the date of disposal (the 6 April 2026 step to 18% BADR), each partner's BADR history and the income split. The point is that the right structure is the one you model before negotiations, not after.

Other Considerations for Solicitors

Professional Indemnity Insurance

In an asset sale the seller stays liable for claims arising from pre-completion work and must carry run-off cover for at least six years after ceasing practice; the buyer's policy covers post-completion work. In a share sale the company's policy continues and the buyer inherits the run-off exposure, which can affect their premium and is a diligence focus. Our PII tax treatment guide has more.

Client Consent and Confidentiality

Under the SRA Code of Conduct and the Accounts Rules, client files and client-account balances cannot simply be transferred without client consent. In an asset sale the buyer has to contact each client to agree to take over the matter, which takes time and can lose some clients. In a share sale the firm continues unchanged, so the sale itself does not require client consent, although ongoing matters still need client instructions.

VAT: TOGC on an Asset Sale, Out of Scope on a Share Sale

A sale of the firm's business and assets as a going concern can qualify as a Transfer of a Going Concern (TOGC), in which case it is treated as neither a supply of goods nor services and no VAT is charged, provided the conditions are met: broadly, the buyer is or becomes VAT registered, intends to carry on the same kind of business, and there is no significant break in trading. Get the conditions wrong and VAT can land on the goodwill. A share sale is outside the scope of VAT, because shares, not the business, are changing hands. Either way, confirm the VAT position before completion.

Which Route Should You Choose?

There is no single answer, but the order of questions is reliable:

• What are you now? A partnership or LLP can only do an asset sale; a company or ABS can do either.
• If you are unincorporated but want a share sale later, do you incorporate first (section 162), and does the SRA route work?
• How is the consideration split between capital (goodwill, fixed assets) and income (WIP, debtors)?
• Where does each partner sit on BADR (the £1 million limit, the two-year and ownership conditions, and the date band on the disposal)?
• What will the buyer actually accept, and how does the regulatory change-of-control process affect timing?

For most partnership and LLP firms, a well-structured asset sale is the route, and the work is in the agreement and the tax split. For incorporated firms, a share sale is available but often needs a price or risk adjustment to land. Our solicitor practice sale guide walks through the full process.

If you are weighing a sale or succession, speak to a legal-sector accountant who can model both structures, test BADR eligibility and the timing of disposal, and get the capital and income split right before you negotiate. Contact us through our contact page or book a free firm health check to start.