Converting a Law Firm to a Limited Company or ABS: Tax and SRA Guide

Two steps, not one: where this guide fits

Before anything else, a clarification that prevents a common and expensive mistake. Incorporating a law firm is not the same as converting a general partnership to an LLP. Converting a partnership to an LLP is an earlier, separate step: both a general partnership and an LLP are tax-transparent, so that conversion does not change the tax character of the firm's profits. It is covered in our guide on the partnership-to-LLP conversion, and that page deals with the partnership-to-LLP step only.

This guide covers the further, distinct step: incorporating an existing partnership or LLP into a body corporate, a company or ABS. An LLP is already a body corporate for company-law purposes, but it is tax-transparent (its members are taxed personally on their profit share). Incorporating into a company changes the tax treatment (the company pays corporation tax, and owners extract by salary and dividend) and the regulatory authorisation (the company needs SRA recognised-body or licensed-body authorisation). The single most important tax point to get right, addressed in full below, is that on a related-party incorporation the company's 6.5% goodwill relief is effectively blocked, while the seller-partners can defer their CGT under section 162. Whether you should incorporate at all is a separate question, worked through in our incorporation decision guide; this page is the how.

The regulatory step: recognised body vs licensed body (ABS)

Incorporation is an authorisation event, and the company must be authorised by the SRA before it can carry on reserved legal activities. There are two routes, driven by who owns and manages the firm.

A recognised body is a company (or LLP) that is wholly owned and managed by lawyers, authorised by the SRA under its firm authorisation rules. A licensed body, or ABS, is a firm with non-lawyer ownership or management, licensed under Part 5 of the Legal Services Act 2007 (sections 71 to 111), with the SRA as a designated licensing authority (under section 73 and Schedule 10). The Act's Part 5 is headed "Alternative business structures," and it is the regime that allows non-lawyer investment in a law firm.

The practical rule is blunt: you cannot simply move the practice into a company and keep trading. The new body must be authorised first. For the wider question of non-lawyer ownership, see our explainer on whether a non-lawyer can buy a UK law firm.

The choice between the two routes is not purely a formality. A recognised body application is the more familiar path for a firm whose owners are all solicitors or other authorised persons, and it keeps the firm within the ownership model most partners already understand. A licensed body or ABS opens the door to outside investment, a non-lawyer chief executive or finance director becoming an owner, or an external buyer taking a stake, which is exactly why many firms incorporate as an ABS even where there is no immediate non-lawyer owner: it preserves the option. The SRA assesses the suitability of owners and managers, the firm's compliance arrangements, and the roles of the COLP (Compliance Officer for Legal Practice) and COFA (Compliance Officer for Finance and Administration), both of which the new body must appoint. Deciding which route to apply for is a decision to take at the planning stage, because it shapes the ownership structure of the company you are about to create.

The order of operations and continuity

Sequencing protects both the regulatory position and the tax reliefs. The usual order is: authorise the new body with the SRA; transfer the business under a transfer agreement; novate client matters and client-account balances (which needs client consent, and is handled against the SRA Accounts Rules client-money framework); transfer or re-arrange the professional indemnity insurance; and deal with run-off on the old entity if it ceases.

On PII, the SRA Minimum Terms and Conditions set minimum cover at £3 million per claim for a recognised body or licensed body, and the old entity, once it ceases, must obtain run-off cover for six years. Timing also matters for tax: aligning the transfer with the firm's accounting and tax year end, and being mindful of the 6 April 2026 rate steps (dividends and Business Asset Disposal Relief), can change the numbers. The company cannot bill for reserved work until the SRA has authorised it, so the regulatory critical path usually sets the overall timetable.

Client-account continuity deserves particular care. Client money held by the old partnership or LLP belongs to the clients, not the firm, so it cannot simply be swept into the new company's client account without proper authority. Matters are typically novated to the new body with client consent, and client balances are transferred in a controlled way that keeps the firm compliant with the SRA Accounts Rules throughout. The COFA of both the outgoing and incoming entity should be involved, and the firm should reconcile the client account around the transfer date so there is a clean record of what moved and when. Getting this wrong is a regulatory problem, not just an administrative one, so it belongs on the critical path alongside the SRA authorisation rather than being treated as a back-office detail to tidy up afterwards.

Transferring goodwill: the partners' CGT and s.162 relief

Goodwill is normally the largest asset on a law-firm incorporation, and transferring it is a capital gains tax event for the partners: goodwill is a capital asset, so the gain is charged to CGT, not income tax. Left unrelieved, that gain would crystallise on incorporation. The relief that solves this is TCGA 1992 section 162, "Roll-over relief on transfer of business".

Section 162 defers the gain where a person who is not a company transfers to a company a business as a going concern, together with the whole of the assets of the business (or the whole other than cash), wholly or partly in exchange for shares issued by the company. The held-over gain is deducted from the chargeable gains on the transferred assets and set against the base cost of the new shares, so tax is deferred until those shares are disposed of. Cash consideration restricts the relief pro rata: to the extent you take cash rather than shares, that slice of the gain is not deferred. Section 162 is often deliberately paired with a later share sale to access Business Asset Disposal Relief, and it is a key reason firms incorporate ahead of an exit. (Note the contrast with the partnership-to-LLP step: section 162 needs a company and shares, so it does not apply to a partnership converting to an LLP, which issues no shares.) Our goodwill tax treatment guide covers the capital-asset analysis in more depth.

The company's goodwill relief: the related-party trap

This is the load-bearing tax point of the page, and it cuts the opposite way to the seller's relief. A company can claim fixed-rate 6.5% per year relief on goodwill and other relevant assets acquired on or after 1 April 2019, under the corporate intangibles rules (CTA 2009 Part 8 Chapter 15A, section 879A onwards), but only as part of an acquisition that also includes qualifying intellectual property, and the relief is restricted on related-party acquisitions.

On a self-incorporation, the partners transfer their existing practice to their own new company, so seller and buyer are related parties. HMRC guidance at CIRD44065 confirms a full restriction where a relevant asset is acquired from a related individual or firm and the third-party-acquisition condition is not met (a partial restriction can apply where the cost of the relevant assets exceeds six times the cost of the qualifying IP). The practical effect: the new company gets effectively no 6.5% amortisation on the goodwill it buys from the incorporating partners. Do not assume otherwise, and do not let a transfer be structured on the basis that the company will write the goodwill down for tax. The relief that survives the incorporation is the seller's section 162 deferral, not the company's amortisation. (There is no relief at all for goodwill acquired between 8 July 2015 and 31 March 2019, a separate historic gap.)

This is the point on which the most optimistic incorporation plans come unstuck. It can be tempting to value the goodwill highly on incorporation, sell it to the company partly for cash or a loan account, and expect the company to amortise it at 6.5% a year against its corporation-tax profits while the partners enjoy a capital sum taxed at the lower CGT rates. The related-party restriction defeats the company side of that plan: the amortisation relief simply is not there. It also means that loading a high goodwill value onto the transfer does not buy the company a tax deduction, while it can create a chargeable gain for the partners if section 162 does not fully cover it (for example because cash consideration restricts the relief). The cleaner approach for most self-incorporations is to transfer the business wholly or mainly for shares, take the section 162 deferral, and accept that the company will not amortise the goodwill. Contrast this with a genuine third-party sale, where a buyer acquiring goodwill at arm's length from an unconnected firm can claim the 6.5% relief; our guides on asset sale versus share sale and goodwill tax treatment cover that opposite outcome.

WIP and debtors on transfer

Work in progress and debtors are trading income, not capital, and that distinction must be reflected in the transfer agreement. On transfer to the company, WIP and debtors can crystallise an income-tax charge, taxed at income rates plus Class 4 National Insurance, where they pass at market value above their book value. A poorly drafted agreement that lumps WIP and debtors into "goodwill" risks an income-tax mischaracterisation, because HMRC can look through the label to the substance. Draft the agreement to split capital (goodwill) from income (WIP and debtors) clearly, or HMRC will do it for you on less favourable terms.

WIP is recognised under FRS 102 revenue recognition, so unbilled time already sits on the balance sheet as an asset and is taxed as it is recognised. For the detailed treatment of WIP on a transfer, see our note on WIP treatment on a law firm sale, and for the wider income-versus-capital split see asset sale versus share sale.

There is also a question of how the consideration for WIP and debtors is paid. Where the company has the cash, it can pay the partners for the WIP and debtors it takes over, which crystallises the income in the partners' hands cleanly. More often the consideration sits as a credit on the partners' loan accounts with the company, to be drawn down over time, which can be a tax-efficient way for the partners to extract value later without further income tax (subject to the section 455 rules if the accounts ever go into debit the wrong way). Either way, the agreement should set out the value attributed to WIP and to debtors separately from the goodwill figure, supported by the firm's own records, so that the income element is identified and taxed correctly rather than being swept into a single lump that HMRC may later challenge. This is one of the areas where careful drafting at the outset saves a difficult conversation with HMRC afterwards.

VAT: transfer of a going concern (TOGC)

The transfer of the business into the company can qualify as a transfer of a going concern (TOGC), which is outside the scope of VAT, where the conditions are met: the business is transferred as a going concern, the company carries on the same kind of business, and the company is or becomes VAT-registered. A valid TOGC means no VAT is charged on the business assets transferred, which avoids a cash-flow and absolute-cost problem on a large goodwill and asset value.

One point catches firms out: the new company must register for VAT in its own right. The old firm's VAT registration does not automatically carry over to the new legal person, and legal services are standard-rated at 20%, so a trading law firm will be over the £90,000 registration threshold. Plan the company's registration to align with the transfer date, and check whether to apply to transfer the existing VAT number. Our guide on VAT registration for solicitors covers the registration mechanics.

Stamp duty and the share question

The incorporation itself transfers business assets, not shares, so the 0.5% stamp duty on share transfers does not apply to the transfer into the company. Stamp duty on shares becomes relevant later, on a subsequent sale of the company's shares, which is the route an incorporated firm uses to be sold. Keep the analysis precise here: SDLT, LBTT or LTT only arise on incorporation if the firm owns property (such as its own premises) that is being transferred, so the property position needs a separate check. Do not overstate a property-tax exposure where the firm rents its premises and simply transfers goodwill, WIP and debtors.

Capital allowances on fixtures and fit-out

If the firm owns premises or fixtures, the capital allowances position needs handling on transfer. A CAA 2001 section 198 election fixes the value of fixtures as between the old firm and the new company, and it carries a two-year limit; missing it can forfeit allowances. Going forward, the company can claim the Annual Investment Allowance (£1 million per year) on qualifying plant and machinery, with writing-down allowances at the main rate of 18%, reducing to 14% from 1 April 2026 for corporation tax (Finance Act 2026 section 28), and the special rate of 6% on integral features. Keep the fixtures election on the conversion checklist; it is a preventable loss if overlooked.

After incorporation: how owners are taxed

Once incorporated, the company pays corporation tax (19% on profits to £50,000, marginal relief to £250,000, 25% above) and the owners extract by salary and dividend. Dividends are taxed at 10.75% (ordinary) or 35.75% (upper) from 6 April 2026 (Finance Act 2026 c.11 section 4), after 8.75% and 33.75% in 2025/26. A salary triggers employer National Insurance at 15% on the slice above the £5,000 secondary threshold (from 6 April 2025), and a director's loan can attract a section 455 charge (33.75% before 6 April 2026, 35.75% on or after). The full extraction comparison, and whether incorporation is worth it at all after the dividend rise, is worked through in our incorporation decision guide, and a corporate-member alternative is examined in our guide on corporate members and the mixed-membership rules.

The change in compliance burden is worth flagging too, because it is part of the ongoing cost of the company route. A company must file annual accounts at Companies House and a corporation-tax return, run a payroll for any director salary, and track director loans and dividends with proper paperwork (board minutes and dividend vouchers) so that distributions are valid and the section 455 position is clear. For partners used to the lighter compliance of an LLP, this is a real and recurring change, not a one-off. None of it is a reason in itself to stay unincorporated, but it should be weighed against whatever structural benefit prompted the incorporation, so the decision is made with the full picture of what running the company will involve.

Two worked sketches

These sketches are illustrative only and are not advice. They show the shape of the two tax points that most often go wrong on incorporation.

Goodwill on incorporation, both sides

Take a partnership whose goodwill is valued at £400,000, transferred to the new company in exchange for shares. On the seller side, the partners' CGT gain on the goodwill is deferred under section 162: the gain is rolled into the base cost of their new shares and is not taxed until they sell those shares. On the buyer side, the company gets no 6.5% amortisation relief on that £400,000 of goodwill, because it is a related-party acquisition (CIRD44065 full restriction). The caption: the relief that survives is the seller's deferral, not the company's amortisation. Treating the £400,000 as a tax-deductible asset for the company would be wrong.

The WIP and debtors split

Now add £120,000 of WIP and £80,000 of debtors transferring with the business. These are income, not capital, so an agreement that bundles them into "goodwill" to maximise the capital treatment risks an income-tax mischaracterisation: HMRC can recharacterise the bundled amount as a trading receipt, taxed at income rates plus Class 4. The caption: draft the agreement to split capital from income, or HMRC will, and on terms you did not choose.

A conversion roadmap

Pulling it together, a typical incorporation runs roughly as follows:

1. SRA authorisation of the new body (recognised body, or licensed body or ABS if there is non-lawyer ownership), started early because it is the critical path.
2. Valuation of the goodwill and the other business assets.
3. Transfer agreement drafted to split capital (goodwill) from income (WIP and debtors) clearly.
4. Section 162 claim to defer the partners' CGT on the goodwill (mindful of any cash element restricting the relief).
5. TOGC treatment for VAT, with the company registering for VAT in its own right.
6. PII and run-off: arrange the company's cover (£3m minimum) and the old entity's six-year run-off.
7. Fixtures election under CAA 2001 section 198 if premises or fixtures are owned (two-year limit).
8. Payroll and dividend set-up for the new extraction model.

Incorporation is genuinely two projects, regulatory and tax, that must both land, and several of the steps (the section 162 claim, the goodwill restriction, the WIP split and the TOGC) are easy to get wrong in ways that are expensive to unwind. If your firm has decided to incorporate, speak to a legal-sector-specialist accountant who can sequence the SRA authorisation alongside the tax transfer, draft the split correctly, and confirm the goodwill and VAT positions before anything is filed.