This question relates to the sale of a sole trader business. I had previously understood that if a business is sold for less than its original purchase price, there would be no capital gain, and therefore no capital gains tax liability. However, a friend recently pointed out that the tax implications may depend on how the sale proceeds are apportioned between goodwill, tangible assets, and the lease (as the business is leasehold). They mentioned that if part of the sale price is allocated to assets, there could be tax due, since the original cost of those assets may have been claimed as capital allowances against trading profits. I’ve also been advised that allocating a larger portion of the sale value to goodwill is typically more advantageous for the seller. Is that correct? If 100% of the sale proceeds were allocated to goodwill, would there still be any tax liability? And if so, how is that calculated in practice? 

Arthur replies: 

When a sole trader in the UK ‘sells the business’, HMRC treats that as a series of separate disposals of each underlying asset. Sale proceeds therefore have to be split on a ‘just and reasonable’ basis between plant and machinery, stock, leasehold interest, goodwill and any other chargeable assets — you cannot simply put the whole price against whichever category is most tax-efficient. If you allocate too much to items on which you previously claimed capital allowances (e.g., equipment), you may create an income-tax balancing charge even though the business as a whole is sold at an overall loss. Conversely, pushing more of the price into goodwill normally shifts the liability into capital gains tax (CGT) and may allow for a business asset disposal relief claim at 14% (for 2025/26), but HMRC will challenge any valuation that is not market-based. Even 100% allocation to goodwill still produces a CGT bill if that goodwill is ‘self-generated’ because its allowable cost is usually nil.