How CGT works when you sell a law firm
The starting point is the split of the price in the sale agreement. Goodwill, tangible assets and (in a share sale) work in progress are capital consideration. Your chargeable gain is that capital consideration minus your base cost: for a partner, broadly your capital contribution plus anything you paid for your share of goodwill; for a shareholder, what you paid or subscribed for the shares.
Business Asset Disposal Relief taxes qualifying gains at 18% from 6 April 2026 (it was 14% in 2025/26 and 10% before April 2025), subject to a £1,000,000 lifetime limit. Gains above the remaining limit fall into normal CGT: 18% within your unused basic rate band, 24% above it. Because BADR gains use the basic rate band first, most sellers with partner-level income pay 24% on the excess.
Structure changes the tax on WIP, not the CGT rates. Selling a partnership or LLP interest, the WIP element is an income receipt taxed at income tax rates. Selling company shares, the buyer pays one price for the shares and the whole amount, WIP included, is capital gain. On larger WIP books this difference alone can move the net proceeds by tens of thousands of pounds.
The annual exempt amount (£3,000 in 2026/27) comes off the gain before any tax is charged. The remaining moving parts are eligibility ones: the 2-year ownership and trading conditions for BADR, the 5% shareholding tests on a share sale, and the salaried member rules for LLP members, all of which need checking well before heads of terms are signed.
Worked example: James is a partner at Whitmore Family Law LLP and is retiring after 12 years. The sale agreement allocates £500,000 to goodwill, £80,000 to WIP and £20,000 to tangible assets. His base cost (capital contribution) is £100,000. His other income in the year of sale is £80,000. As a partnership exit, WIP of £80,000 is an income receipt (ITTOIA 2005 ss.182 to 185) and falls outside the CGT calculation. Capital proceeds are £500,000 + £20,000 = £520,000. Gain before AEA: £520,000 minus £100,000 = £420,000. After the £3,000 annual exempt amount, taxable gain = £417,000. BADR applies at 18% (from 6 April 2026) on the full £417,000 within the £1,000,000 lifetime limit, giving CGT of £417,000 x 18% = £75,060. Net capital proceeds after CGT = £520,000 minus £75,060 = £444,940. The £80,000 WIP element is then taxed separately at James's income tax rates.
Frequently asked questions
- What CGT rate applies when I sell my law firm in 2026/27?
- If Business Asset Disposal Relief applies, qualifying gains are taxed at 18% up to your remaining £1,000,000 lifetime limit. Gains above that limit are taxed at the standard CGT rates: 18% to the extent you have unused basic rate band, and 24% above it. Most equity partners have no basic rate band left after their profit share, so the excess is usually taxed at 24%.
- Do I still get Business Asset Disposal Relief at 18%?
- BADR still exists but the rate has risen: 10% before 6 April 2025, 14% in 2025/26, and 18% from 6 April 2026. The £1,000,000 lifetime limit is unchanged. For a partnership interest you generally need to have been a partner in the trading business for at least 2 years. For company shares you generally need at least 5% of the ordinary shares, votes and economic rights, and to be an officer or employee, for the 2 years to the sale.
- How is WIP taxed when a firm is sold?
- It depends on what is being sold. On the sale of a partnership or LLP interest, the amount received for unbilled work in progress is an income receipt under ITTOIA 2005 sections 182 to 185, taxed at income tax rates, not as capital gain. On a company share sale, the buyer pays a single price for the shares, so the WIP value inside that price is part of the capital gain and can benefit from BADR.
- Is selling a partnership interest taxed differently from selling company shares?
- The CGT rates are the same, but three things differ. First, WIP: income on a partnership exit, capital on a share sale. Second, base cost: a partner's base cost is broadly their capital contribution plus any amount paid for goodwill, while a shareholder's is the price paid or subscribed for the shares. Third, the BADR conditions differ: partnership interests need the 2-year partner-in-a-trading-business test, shares need the 5% personal company tests as well.
- What if I have already used some of my BADR lifetime limit?
- The £1,000,000 limit is a lifetime figure covering every disposal on which you have claimed BADR, and Entrepreneurs' Relief claims before 2020 count against it too. Only the unused balance is available at 18%; the rest of the gain falls into normal CGT at 18% or 24%. Use the advanced option in the calculator to enter your remaining allowance.
- Can I reduce the CGT before selling?
- The big levers are set before the deal, not after: confirming BADR eligibility for every selling partner or shareholder (including fixing salaried member or sub-5% problems at least 2 years out), the goodwill vs WIP allocation in the sale agreement, timing the completion date against your income and other gains, and spousal transfers to use two annual exempt amounts and two BADR limits. All of these need doing well before exchange, which is why exit planning should start 2 or more years ahead.
Planning an exit or succession?
This calculator gives directional figures based on published 2026/27 rates. The real answer depends on BADR eligibility for each seller, the goodwill and WIP allocation in the sale agreement, your partnership or shareholders' agreement, and timing. We model the full picture, including income tax on WIP, as part of our exit planning work.
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