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Sole Trader

A sole trader is the simplest way to run a business. There is no separate legal entity — the business and the person running it are, in law, the same thing. This simplicity has real advantages. It also has real implications — for liability, for tax, and for what happens to the business when the owner dies or loses capacity.

What a sole trader is

A sole trader is a man or woman who runs a business in their own name, without incorporating it as a company or entering into a formal partnership with anyone else. There is no registration required to become a sole trader — other than registering with HMRC for Self Assessment and, where turnover exceeds the VAT threshold, for VAT. The business does not have its own legal identity. It exists through the person who runs it.

The sole trader and the business are legally indistinguishable. Contracts entered into in the course of the business are the sole trader's personal contracts. Debts incurred by the business are the sole trader's personal debts. Assets used in the business are the sole trader's personal assets. Income generated by the business is the sole trader's personal income, taxed through Self Assessment at their personal income tax rate.

How it is created

A sole trader structure comes into existence simply by trading. There is no formal document, no registration at Companies House, no constitution or governing rules. The only formal steps are registering with HMRC for Self Assessment — which must be done by 5 October following the end of the first tax year of trading — and keeping appropriate financial records. The business can trade under the owner's own name or a trading name. A trading name does not create a separate legal entity — it is simply a name under which the sole trader operates.

Liability

The most significant characteristic of a sole trader structure is unlimited personal liability. Because the business and the person are legally the same, there is no separation between personal and business assets when it comes to debts. If the business cannot pay its debts, the sole trader's personal assets — savings, property, investments — can be used to meet them. This is the fundamental risk of operating as a sole trader, and the primary reason many business owners eventually consider incorporating.

Tax

A sole trader pays income tax on business profits through Self Assessment, at their personal income tax rate. They also pay Class 2 and Class 4 National Insurance contributions on profits above the relevant thresholds. There is no corporation tax — because there is no separate company. Business expenses can be deducted from income before tax, reducing the taxable profit. VAT registration is required where turnover exceeds the VAT threshold — currently £90,000 per year.

On death — what happens to the business

Because a sole trader and the business are legally the same, the business cannot survive the death of the owner in the way a company can. There is no separate legal entity to continue. When the sole trader dies, the business — as a going concern — effectively ceases to exist in its current form.

What passes to the estate is the assets of the business — stock, equipment, tools, vehicles, intellectual property, goodwill, outstanding debts owed to the business, and any other business assets. These form part of the deceased's estate and are dealt with by the executor under the terms of the Will — or the rules of intestacy if there is no Will. The executor has authority to carry on the business for the purpose of winding it up, or for such period as is reasonably necessary to obtain the best outcome for the estate.

Contracts the sole trader had entered into personally — with clients, suppliers, employees — do not automatically transfer. Many will terminate on death. Employment contracts, in particular, terminate automatically. Existing client relationships and ongoing work will need to be carefully managed by the executor, often with the assistance of a professional.

Goodwill — a particular consideration. The goodwill of a sole trader business — the value of the relationships, reputation, and ongoing client base — is often the most significant asset. It can also be the most fragile. Goodwill that exists in the personal relationships of the sole trader may have little value once the sole trader is no longer there. A Will should address what is to happen to the business, and ideally include provisions for its sale or transfer as a going concern — before the goodwill dissipates.

On death — estate planning considerations

A sole trader's business assets may qualify for Business Relief — reducing their IHT value by up to 100% if the conditions are met. A qualifying sole trader business held for at least two years before death may be entirely outside the taxable estate for IHT purposes — a significant relief for estates that include a substantial business. The April 2026 changes to Business Relief introduced a £2,500,000 cap on 100% relief — assets above this threshold now receive 50% relief. Planning around this is covered in the Business Relief Trust Will helpsheet.

A Will for a sole trader should specifically address the business. Who should deal with it? Should the executor attempt to sell it as a going concern, or wind it down? Are there trusted employees or colleagues who might purchase it? Is there a family member who could take it on? These are questions a Will can answer — or leave entirely to the executor's discretion, if that is the appropriate approach.

On incapacity — what happens to the business

If a sole trader loses mental capacity — through illness, accident, or any other cause — the business faces an immediate practical problem. There is no separate legal entity, no board of directors, no partners to step in. The business depends entirely on the sole trader's ability to act. Without a Property & Financial Affairs LPA in place, no one has the legal authority to manage the business on the sole trader's behalf.

A Property & Financial Affairs LPA — granted to a trusted attorney — gives that attorney the legal authority to manage financial and legal affairs, including the business, if the sole trader loses capacity. Without one, the only route is an application to the Court of Protection for a Deputyship Order — a process that can take months and cost significantly more than putting an LPA in place would ever have done. During that period, the business may be unable to operate — contracts cannot be signed, accounts cannot be managed, and employees may be left in an uncertain position.

"A sole trader who loses capacity without an LPA in place leaves their business in limbo. Their attorney cannot step in — because there is no attorney. Their family cannot act — because they have no legal authority. The business that took years to build can unravel in weeks, not because of anything that was done wrong, but simply because no one had the legal authority to keep it running."

Key planning points for sole traders

• A Will that specifically addresses the business — what happens to it, who deals with it, and on what terms.

• A Property & Financial Affairs LPA appointing a trusted attorney with the knowledge and ability to manage business affairs if capacity is lost.

• A review of whether Business Relief applies to the business assets — and whether the April 2026 changes affect the planning.

• Consideration of whether the sole trader structure remains appropriate as the business grows — or whether incorporation might offer better protection for both the business and the owner's personal assets.

• Clear records of business assets, clients, contracts, and outstanding debts — so that an executor or attorney can understand the business quickly if they need to step in.