A sole trader’s business has no existence separate from its owner, so on death it becomes part of the estate and normally ceases for tax purposes. The personal representatives must collect what the business is owed, pay its debts from the estate, deal with staff, VAT and the final tax return, and then sell the assets or pass them to beneficiaries, with Inheritance Tax Business Relief and the capital gains uplift often reducing the tax bill.

Who takes control of the business when a sole trader dies?

The executors named in the will, or administrators if there is no will, become responsible for everything the deceased owned and owed, including the business. Their authority comes from their role as personal representatives, normally confirmed by a grant of probate or letters of administration. Any authority the deceased gave an accountant or agent ends on death; see dealing with a deceased client.

HMRC’s Business Income Manual at BIM80570 explains why the trade normally stops: personal representatives are restricted to winding up the deceased’s affairs for the beneficiaries, and that does not normally include carrying on the business. HMRC accepts that the facts sometimes show the executors did carry on trading, in which case they are trading themselves, with the tax consequences that follow.

What happens to contracts, customers and employees?

Each contract needs to be read. Many contain clauses dealing with the death of a party, and work that depends on the trader’s own skill cannot be completed by anyone else. In broad terms:

  • Money owed to the business, such as unpaid invoices and work completed before death, is an asset of the estate and the personal representatives collect it.
  • Customers who paid in advance for work not done become creditors of the estate.
  • Leases, finance and hire agreements usually continue as liabilities of the estate until ended in accordance with their terms.

Employees

Under section 136(5) of the Employment Rights Act 1996, an event affecting an employer, expressly including the death of an individual employer, which ends an employee’s contract is treated as a termination by the employer for redundancy purposes. Section 174 adapts the rules where the personal representatives renew or re engage the employee within eight weeks of the death. If staff are not kept on, they may be entitled to statutory redundancy pay from the estate, along with notice pay and accrued holiday pay. The payroll also needs closing down properly with HMRC.

How are the business debts dealt with?

Because a sole trader has unlimited liability, business debts are simply debts of the deceased, payable from the whole estate, not just the business assets. See sole traders and unlimited liability. GOV.UK guidance on dealing with an estate says personal representatives must pay the debts and settle the taxes, including tax on profits from the deceased’s trade or business, before distributing.

The same guidance recommends placing a notice in The Gazette giving creditors two months to claim, and not distributing assets until that period has passed. If the personal representatives distribute and the estate cannot then pay a debt, they may have to pay it themselves. For business estates with unknown liabilities, such as possible warranty claims or a pending HMRC enquiry, this protection is particularly valuable.

If debts exceed assets, the estate is insolvent. The Insolvency Service’s technical guidance explains that the estate can then be administered in bankruptcy under the Administration of Insolvent Estates of Deceased Persons Order 1986, through an insolvency administration order, and that the personal representative may petition for one.

How is income tax worked out for the final period?

From 2024 to 2025 onwards, section 7 of the Income Tax (Trading and Other Income) Act 2005 charges tax on the profits of the tax year. A trade that ceases on death is therefore taxed in the final year on the profits from 6 April to the date of death. See basis period reform.

Two adjustments are specific to death:

  • Stock and work in progress. BIM33520, citing sections 173(4) and 182(3) ITTOIA 2005, says the closing value on a sole trader’s death is the lower of cost and net realisable value, rather than under the general valuation rules for other cessations.
  • Business passing to a surviving spouse or civil partner. BIM80570 says the cessation and commencement rules apply, so the deceased’s trade ends and the spouse starts a new one. CA15300 says capital allowances are computed as if the assets passed to the spouse at open market value, and HMRC accepts the probate value for this.

GOV.UK says HMRC will tell the personal representatives if a Self Assessment return is needed for the deceased, and the return must reach HMRC by the date in HMRC’s letter. Income the estate earns after death, such as late receipts or rent from business property, is reported separately for the estate.

What about VAT?

HMRC’s VAT Registration Manual at VATREG43200 says that on the death of a sole proprietor, whoever actually carries on the business, usually the executor or administrator, is registered as the taxable person. Where the business is likely to be transferred to a beneficiary or sold as a going concern in the near future, HMRC can use regulation 9 of the VAT Regulations 1995 to treat that person as carrying on the deceased’s business under the existing number. VATREG42750 explains that the person carrying on the business must notify HMRC and is responsible for VAT on supplies made while they control it. If nobody continues the business, the registration is cancelled.

Which capital taxes apply?

Capital gains tax. Section 62 of the Taxation of Chargeable Gains Act 1992 treats the personal representatives as acquiring the deceased’s assets at market value at the date of death, and death is not a disposal by the deceased. Business premises and goodwill that have grown in value are therefore rebased without a CGT charge; see CGT uplift on death.

Inheritance tax. GOV.UK says 100% Business Relief is available on a business or an interest in a business, provided the deceased owned it for at least two years. For deaths on or after 6 April 2026, 100% relief is capped at £2.5 million of qualifying business and agricultural property, with 50% relief above that, and an unused allowance can be transferred from a spouse or civil partner who died earlier. Relief is not available if the business mainly deals in securities, shares or property or makes or holds investments, or if the business is being sold. Assets not used mainly for the business, or not needed for its future use, do not qualify. See Business Relief.

How might this work in practice?

Illustration only. A self employed printer dies on 10 September 2026 owning the business, its equipment and the freehold workshop, with a business overdraft of £20,000 and two employees. The executors collect £18,000 of unpaid invoices and pay the overdraft and suppliers from the estate, after a Gazette notice. They do not keep the staff on, so the contracts are treated as ended by the employer, and redundancy, notice and holiday pay are paid from the estate. The final Self Assessment return covers profits from 6 April to 10 September 2026, with stock valued at the lower of cost and net realisable value. The workshop and goodwill pass to the son at probate value for CGT, and Business Relief is claimed on the business and the workshop used in it, subject to the £2.5 million cap. The VAT registration is cancelled because the son does not carry on the trade.

What mistakes cause problems?

  • Family members carrying on the business informally, which can make them trade in their own right and expose them personally.
  • Distributing the estate before business creditors and HMRC have been dealt with.
  • Valuing closing stock at market value, or overlooking work in progress for a professional practice.
  • Forgetting the VAT registration, so returns and penalties continue to accrue in the deceased’s name.
  • Assuming Business Relief covers investment property or surplus cash held in the business.
  • Not budgeting for redundancy and holiday pay owed to staff.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.