How Is Goodwill Taxed When a Law Firm Is Sold? A Solicitor's Guide to Capital Disposal, BADR and Section 162

Why the Tax Treatment of Goodwill Decides How Much You Keep

When a law firm changes hands, the largest single item on the deal is rarely the desks, the servers or the lease. It is the goodwill: the value a buyer places on the right to step into your practice, trade under its name, and keep its clients instructing the firm after you have gone.

How that goodwill is taxed decides how much of the price you actually keep. Treat it correctly and the gain is charged to Capital Gains Tax (CGT), potentially at a reduced rate. Treat it as trading income by mistake and you can hand over a much larger slice in income tax and National Insurance. This article sets out how goodwill is taxed on the sale of an England and Wales law firm: the capital-versus-income line, the Business Asset Disposal Relief rate and its conditions, section 162 incorporation relief, and the relief the buyer can (and often cannot) claim.

This page covers the tax. The mechanics of putting a number on the goodwill in the first place are dealt with separately in our guide to how law firm goodwill is valued, and the choice between an asset sale and a share sale is covered in asset sale versus share sale for a UK law firm.

What Counts as Goodwill in a Law Firm

Goodwill is the premium a buyer pays over the value of the identifiable assets, for the expectation that clients will keep coming. In a law firm it usually reflects:

• Ongoing client relationships and recurring instructions
• The firm's brand and standing in a particular area of law, such as conveyancing, family or commercial litigation
• Referral relationships with introducers, agents and other professionals
• An established team, systems and accreditations that a buyer would otherwise have to build

HMRC and valuers distinguish personal goodwill, which is tied to an individual solicitor's skills and reputation, from practice goodwill, which is attached to the firm itself. Personal goodwill is hard to transfer because it walks out of the door with the person, so it can carry little market value if that individual is not staying with the practice. Practice goodwill is the transferable, saleable element, and it is what most of the tax analysis below is concerned with.

Goodwill Is Capital, Not Trading Income

The single most important point is also the most commonly missed. Goodwill is a capital asset. The gain on selling it is charged to Capital Gains Tax, not income tax, and it belongs on the capital gains pages of your self-assessment return, not in your trading profit.

That distinction does real work. Income would be taxed at rates of up to 45%, with Class 4 National Insurance on top for a partner. A capital gain is taxed at 18% or 24%, and potentially less if a relief applies. Reporting goodwill as income, or letting the sale agreement blur the two, is an expensive error.

It also matters because not everything in the deal is capital. Work in progress (WIP) and debtors are trading income, not goodwill. WIP is brought into account as an income receipt on a sale or cessation (ITTOIA 2005 ss.182 to 185) and is taxed at income tax rates plus Class 4 NIC, and billed debtors are simply trading receipts. The sale agreement therefore has to split the consideration cleanly: goodwill and fixed assets on the capital side, WIP and debtors on the income side. We deal with this in detail in our note on how WIP is treated on a law firm sale. If the split is vague, HMRC can recharacterise part of what you thought was a capital gain as income.

The Capital Gains Tax Rates That Apply

Start with the standard CGT position, because that is the fallback whenever a relief does not apply or runs out. For individuals, gains on chargeable assets (goodwill included) are taxed at:

• 18% on gains that fall within your remaining basic rate band
• 24% on gains above the basic rate band

These rates apply to all chargeable assets following the change on 30 October 2024, when the former 10% and 20% rates on non-residential assets were raised to 18% and 24%. Each individual also has an annual exempt amount of £3,000 for 2025/26 (and 2026/27). On a typical law firm sale the gain runs well past £3,000, so the exemption shaves only a little off the top, but it should still be used.

These standard rates are also where you land for any part of a gain that falls outside Business Asset Disposal Relief, including gains above the BADR lifetime limit. That is why BADR is worth understanding properly rather than assumed.

Business Asset Disposal Relief (BADR): the Rate Now Depends on the Date

BADR is the most valuable relief most selling solicitors can reach. It reduces the CGT rate on qualifying gains, up to a £1 million lifetime limit per individual. The critical update is that BADR no longer sits at a single headline figure. The rate is tied to the date of disposal:

• 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

So the relief still helps, but by 6 April 2026 the BADR rate (18%) matches the lower standard rate, and the advantage over the 24% higher rate narrows to six points. The step-up on 6 April 2026 is a genuine planning lever for anyone whose completion is near that boundary. Note also the old name: BADR was formerly Entrepreneurs' Relief, a label you may still see in older deeds and articles, but the relief and its rates are now as set out above.

To qualify for BADR on the goodwill in a law firm sale, the conditions must be met throughout the two-year period ending with the disposal:

• The firm is a trading business (a solicitors' practice qualifies)
• On an asset sale of a partnership or LLP, you are a genuine partner or member disposing of the whole or a part of the business, not merely an interest in isolated assets
• On a share sale of an incorporated firm, you hold at least 5% of the ordinary share capital and 5% of the voting rights, are an officer or employee, and have at least a 5% economic entitlement
• You have held that qualifying interest or shareholding for at least two years up to the disposal

A partner caught by the Salaried Member Rules (Finance Act 2014, ITTOIA 2005 ss.863A to 863G) may be treated as an employee for tax and so as not holding a genuine, BADR-qualifying interest in the goodwill. Status here turns on substance rather than the words "partner" in the deed, so a salaried or fixed-share partner should confirm their position before relying on the relief.

Worked Example: BADR on a Partnership Share

Consider an equity partner in a three-partner conveyancing firm who sells her share. The goodwill element of that share is agreed at £400,000, and she has been a full equity partner for eight years, so the two-year condition is comfortably met. Assume no base cost. If she completes within the 14% band, the CGT on the goodwill gain is £400,000 at 14%, which is £56,000. At the standard 24% higher rate the same gain would cost £96,000, so the relief saves £40,000. If the same disposal instead completed on or after 6 April 2026, the BADR rate would be 18%, giving £72,000, which is why the timing of completion can move the bill by tens of thousands of pounds.

Section 162 Incorporation Relief: Deferring the Charge

If, rather than selling to an outside buyer, you are moving an unincorporated practice into a company (for example incorporating a partnership or LLP as a recognised body or ABS), section 162 incorporation relief (TCGA 1992 s.162) can defer the CGT on the goodwill.

Section 162 applies automatically where you transfer the whole business as a going concern to a company in exchange for shares. The gain on the goodwill and the other chargeable assets is not taxed at the point of incorporation. Instead it is rolled into the base cost of the shares you receive, and the tax surfaces only when you later dispose of those shares.

Two conditions do the heavy lifting. First, the whole business (or substantially all of its assets, broadly excluding cash) must transfer. Second, the consideration must be shares. If you take part of the value as cash, the relief is restricted in proportion to the cash element, and that proportion of the gain becomes chargeable immediately. Used well, section 162 lets an owner roll an unincorporated firm into a company and then, in time, structure a share sale that can itself access BADR, subject to the share-sale conditions above.

Worked Example: Section 162 on Incorporation

Take a sole practitioner running a litigation practice who incorporates it as a company, with the goodwill valued at £250,000, and who takes 100% of the shares as the only consideration. Section 162 defers the £250,000 gain, so nothing is payable on incorporation; the deferred gain instead reduces the base cost of the shares. If, after holding the shares for several years, the practice is sold for £500,000, the gain on that share sale is computed using the reduced base cost, so the deferred £250,000 effectively comes back into charge at that point, taxed at the standard or BADR rate that then applies depending on whether the share-sale conditions are met.

The Buyer's Side: Goodwill Relief and Its Conditions

The buyer's tax treatment is the mirror image and is just as easy to get wrong. A company buying a business can claim relief on the cost of acquired goodwill, but only within narrow rules.

For goodwill and other relevant assets acquired on or after 1 April 2019 as part of a business acquisition (CTA 2009 Part 8 Chapter 15A, s.879A onwards), the company can claim fixed-rate relief of 6.5% a year on a straight-line basis, but two conditions bite:

• The acquisition must also include qualifying intellectual property. Goodwill bought on its own does not unlock the relief.
• The relief is capped at six times the qualifying IP spend, so the IP element governs how much goodwill relief is available.

For goodwill acquired between 8 July 2015 and 31 March 2019 there is no relief at all, a gap that still affects firms whose goodwill was bought in that window.

The trap that catches incorporating practices is the related-party restriction. When the same partners who owned the firm sell its goodwill into their own new company, buyer and seller are related parties. In that case the third-party acquisition condition is not met, and the new company generally gets no 6.5% amortisation relief on that goodwill (HMRC CIRD44065). So do not assume a newly incorporated firm can write down the goodwill it bought from its founders. It usually cannot, and the company will be taxed on its profits without a deduction for that goodwill.

If you are advising a buyer, or buying yourself, always test three things before assuming relief: the acquisition date, whether qualifying IP is included, and whether buyer and seller are related. The answer drives whether the goodwill cost is deductible at all.

Practical Steps Before You Sell

To keep the goodwill tax treatment clean, deal with these in advance:

• Get a defensible valuation. An unsupported goodwill figure invites challenge. A valuation from someone who understands legal practices anchors the capital figure you are taxing. See our goodwill valuation guide.
• Check the deed. Many partnership deeds set out how goodwill is shared on retirement or sale. Make sure it reflects what you intend, before you negotiate the price.
• Mind the date. Completing before 6 April 2026 keeps a qualifying gain in the 14% BADR band rather than the 18% band. For a near-boundary deal, that timing is worth modelling.
• Test the structure. Incorporating and claiming section 162 can defer the charge if you are continuing, but weigh that against the ongoing corporation tax and extraction costs of running through a company.
• Separate WIP from goodwill. WIP and debtors are income, not capital. The sale agreement must split them out cleanly, or HMRC can tax part of the deal as income.

Common Mistakes to Avoid

• Treating goodwill as income. It is a capital disposal. Reporting it as trading profit can mean income tax of up to 45% plus NIC instead of CGT.
• Assuming BADR is still 10%. It is 14% for disposals in 2025/26 and 18% from 6 April 2026. Use the rate for the actual date of disposal.
• Overlooking the two-year and salaried-member conditions. A short holding period, or salaried-member status, can remove BADR entirely.
• Ignoring the £1 million BADR limit. Gains above the lifetime limit fall back to the standard 18% and 24% rates.
• Expecting buyer goodwill relief on a self-incorporation. Related-party rules usually deny the 6.5% relief when partners sell into their own company.
• Forgetting the annual exempt amount. It is £3,000 for 2025/26. Small on a practice sale, but it should still be claimed.

How a Solicitor Accountant Can Help

The goodwill on a law firm sale brings CGT, BADR, section 162 relief, the WIP-versus-goodwill split and the buyer's goodwill rules into the same transaction, and each has conditions that can flip the answer. An accountant who works specifically with legal practices can structure the deal so the capital and income elements are split correctly, the reliefs are actually available, and the timing works in your favour.

We work with equity partners, fixed-share partners and sole practitioners across England and Wales. If you are planning to sell or incorporate your practice, contact our team for a confidential discussion of your position.