Key facts
- A sole trader business sale is not a single disposal — each asset is disposed of separately for CGT.
- Goodwill is often the most valuable chargeable asset and is subject to CGT.
- Trading stock sold as part of the business is taxed as trading income, not a capital gain.
- BADR at 10% is available on qualifying gains if you have owned the business for at least 2 years.
- The business must cease trading for disposal of individual assets to qualify for BADR.
How a Sole Trader Business Sale Works for CGT
Unlike selling shares in a limited company (which is a single disposal), selling a sole trader business involves the individual disposal of each asset. Each chargeable asset produces its own separate capital gain or loss.[1]
The main categories of assets and their tax treatment are:
| Asset | Tax Treatment |
|---|---|
| Goodwill | Capital gain (base cost usually nil for self-generated goodwill) |
| Freehold/leasehold property | Capital gain (base cost = original purchase price + improvements) |
| Plant & machinery | Balancing charge/allowance (trading income, not CGT) |
| Trading stock | Trading income (not CGT) |
| Debtors | Trading income when collected |
| Cash | No tax consequences |
| Intellectual property (patents, trademarks) | Capital gain |
Goodwill
For most sole traders, goodwill is the largest source of chargeable gains on a business sale. Goodwill represents the value of the business over and above its identifiable assets — including the customer base, reputation, and brand.[2]
Since goodwill is self-generated (built up over time through your own efforts), its base cost for CGT is nil. This means the entire sale value attributed to goodwill is a chargeable gain.
Valuing goodwill requires careful consideration. Methods include:
- Multiple of profit: Typically 1–3 times annual super-profits (profits above a normal return)
- Turnover-based: A percentage of annual turnover (common in professional practices)
- Comparable transactions: What similar businesses have sold for
Tip: The allocation of the sale price between goodwill and other assets can significantly affect the tax position. Both buyer and seller should agree the apportionment, ideally with professional valuations. HMRC can challenge unreasonable apportionments.
Plant and Machinery
Plant and machinery (vehicles, tools, computers, furniture) are dealt with through the capital allowances system, not CGT. On cessation of the business:[4]
- If sale proceeds exceed the tax written-down value, a balancing charge arises — this is added back as trading income in your final year
- If proceeds are less than the written-down value, a balancing allowance gives additional tax relief
- Proceeds are capped at original cost for balancing charge purposes (the excess over original cost would be a capital gain, but this is rare for depreciating assets)
Trading Stock
Stock sold as part of the business is taxed as trading income, not as a capital gain. The proceeds are included in your final trading profit calculation.[4]
If stock is transferred to the buyer at below market value (as part of a package deal), HMRC may adjust the figure to market value for tax purposes. If the buyer and seller are connected persons, market value is automatically substituted.
Claiming BADR on the Sale
Business Asset Disposal Relief (BADR) can reduce the CGT rate to 10% on qualifying gains when you sell your sole trader business:[3]
- You must be disposing of the whole or a distinct part of the business
- The business must have been owned for at least 2 years
- The disposal must be of a genuine trade (not an investment business)
- If you are disposing of individual assets after cessation, the disposal must be within 3 years of the business ceasing
Cessation and Final Tax Return
When the business ceases, several tax obligations arise:
- You must complete a final Self Assessment tax return covering all income and gains up to cessation
- Overlap relief (basis period overlap from when you started) is deducted in the final year’s trading profit
- You must de-register for VAT (if registered) within 30 days of ceasing to make taxable supplies
- You should notify HMRC that the business has ceased by updating your Self Assessment registration
Post-cessation receipts: Any amounts received after the business has ceased (such as late-paying debtors) are taxed as post-cessation receipts. Similarly, post-cessation expenses may be deductible if they arise from the former trade.
Worked Example
David sells his consultancy business (sole trader) for £350,000, allocated as follows:
| Asset | Sale Price | Base Cost | Tax Treatment |
|---|---|---|---|
| Goodwill | £200,000 | £0 | Capital gain: £200,000 |
| Office equipment | £15,000 | WDV £8,000 | Balancing charge: £7,000 (income) |
| Debtors | £35,000 | £35,000 | Trading income (already recognised) |
| Cash in bank | £50,000 | n/a | No tax charge |
| Website/IP | £50,000 | £5,000 | Capital gain: £45,000 |
Total chargeable gains: £245,000. Less Annual Exempt Amount (£3,000) = £242,000 taxable. With BADR at 10%, the CGT is £24,200.
Frequently Asked Questions
Do I pay CGT on the full sale price of my business?
No. Each asset is treated separately. Capital gains arise on chargeable assets (goodwill, property, equipment). Trading stock is taxed as income. Cash and debtors transferred do not usually give rise to gains. You can also deduct allowable costs and the Annual Exempt Amount.
Is goodwill a chargeable asset?
Yes. For a sole trader, goodwill has a base cost of nil (since it was self-generated), so the entire sale value of the goodwill is a chargeable gain. This is often the largest CGT liability on selling a business.
Can I claim BADR when selling my sole trader business?
Yes, provided you have owned and operated the business for at least 2 years. You must be disposing of the whole or part of the business (not just individual assets while continuing to trade). BADR reduces the CGT rate to 10%.
What happens to capital allowances when I sell equipment?
When you sell plant and machinery, a balancing charge or balancing allowance arises in your final tax computation. If sale proceeds exceed the tax written-down value, the excess is added back as a balancing charge (taxed as trading income). If proceeds are less, you get a balancing allowance.
Further Reading
- Business Asset Disposal Relief (BADR) — full guide to the 10% rate
- Goodwill & Intangible Assets — detailed guidance on goodwill valuation and tax
- Incorporating a Business: CGT — transferring to a company instead of selling
- Capital Losses — offsetting losses from the sale against gains
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