What Are Heads of Terms in a Dental Practice Sale?
Heads of terms (often shortened to HoT) are the preliminary document that records the key commercial terms of a dental practice sale before the lawyers draft the full contract. They are almost always non-binding on the main commercial points, with a small number of clauses (exclusivity, confidentiality and the parties bearing their own costs) drafted to bind. Treat them as the blueprint for the sale and purchase agreement that follows.
For a dental practice the heads of terms should set out the price, how it is split between goodwill, equipment and any property, whether the deal is an asset sale or a share sale, the earn-out or deferred-payment treatment, and the conditions that must be met before completion. Get these right and the tax planning follows cleanly. Leave them vague and you are renegotiating the most expensive points of the deal under time pressure.
This guide focuses on what to put in the heads of terms and, more importantly, the tax points to settle early. If you are at the start of the process, our page for practice buyers sets out the wider route.
Why the Tax Points Belong in the Heads of Terms
By the time solicitors are drafting the full agreement, the structure is usually fixed and the price is broadly agreed. The cheapest moment to influence the tax outcome is at heads of terms, before either side has anchored on a number. Four decisions made here drive the tax for both parties: the choice between an asset sale and a share sale, the split of the price between goodwill and tangibles, how any earn-out is treated, and the disposal date that governs the capital gains tax rate.
Each of these is hard to reverse once it is in the signed agreement. A seller who discovers after exchange that the structure has cost them Business Asset Disposal Relief, or a buyer who finds the goodwill split gives them little tax relief, has very little room left to move.
The Key Heads of Terms Items and the Tax They Drive
The table below maps each heads of terms item to the tax point it controls. Use it as a checklist when you read a draft.
| Heads of terms item | What it decides | The tax it drives |
|---|---|---|
| Asset sale vs share sale | Whether the buyer takes the business and assets or the company itself | Whether the seller can reach BADR (a company asset sale leaves the gain in the company, so the shareholder gets no BADR on it), whether the buyer gets capital allowances and goodwill relief, and whether latent company liabilities transfer |
| Goodwill and tangibles split | How the headline price is allocated across goodwill, equipment, fixtures and property | The seller's CGT exposure and the buyer's capital allowances and goodwill amortisation relief; the split is the figure HMRC tests, so it needs a basis |
| Earn-out or deferred consideration | How much of the price is fixed, deferred or contingent on future performance | Whether part of the gain is taxed as a separate asset (the Marren v Ingles right), whether BADR reaches it, and whether instalment relief is available |
| Completion timing and conditionality | Whether exchange is unconditional or conditional, and the completion date | The CGT disposal date (s.28), which fixes the BADR rate band that applies to the gain |
| NHS contract condition | That the deal depends on novation of the NHS contract with commissioner consent | Whether the contract is conditional (which moves the disposal date) and whether the price holds if the commissioner reduces contract value |
| Exclusivity and confidentiality | A locked negotiating window and protection of shared information | Usually the only genuinely binding clauses; no direct tax effect but they protect the deal while the tax structuring is settled |
| Price adjustment mechanism | Completion accounts or a locked-box with a leakage clause | The final consideration figure, which feeds the seller's gain and the buyer's base cost and allowances |
Asset Sale or Share Sale: the Structural Choice
Most dental practice sales are structured as asset sales (sometimes called a business sale). The buyer takes the goodwill, equipment and any property, but not the selling company. This gives the buyer a clean position with no inherited liabilities and lets the buyer claim capital allowances on the tangibles and, where the conditions are met, fixed-rate relief on the goodwill.
The structure has a sharp tax consequence for the seller, and it depends on who currently owns the practice. Where the practice is unincorporated, an asset sale by the individual sole trader or partner can qualify for BADR on the gain. Where the practice is already a company and that company sells its assets, the gain sits inside the company and is taxed as a corporation tax charge. The individual shareholder gets no BADR on that asset sale, and extracting the net proceeds out of the company then triggers a further charge. This double layer is the single most important reason an incorporated seller usually prefers a share sale, and it is why the structure must be settled at heads of terms, not assumed.
A share sale is only available if the practice is incorporated. The buyer takes the company with its trading history, which can help preserve NHS contracts and CQC registration, but inherits the company's liabilities and gets no fresh capital allowances or goodwill relief on assets already in the company. For the shareholder seller, a share sale can qualify for BADR where the conditions are held throughout the two years to disposal: a trading company, at least 5% of ordinary share capital and 5% of voting rights, and officer or employee status. We compare the two routes in full in our guide to asset sale vs share sale for a dental practice.
The Goodwill and Tangibles Split
The headline price is one number, but how it is split across goodwill, equipment, fixtures and any property changes the tax for both sides. Goodwill is typically the large majority of a dental practice price, with tangibles making up the balance. The split is not a formality, because it is the figure HMRC will test if the seller and buyer take inconsistent positions.
For the buyer, the equipment and fixtures element can attract capital allowances, with the Annual Investment Allowance giving full relief on qualifying plant and machinery up to the £1m limit. The goodwill element can attract fixed-rate relief at 6.5% per year, but only where the goodwill is acquired as part of a business acquisition that also includes qualifying intellectual property, and the relief is capped at six times that qualifying-IP spend. A blanket assumption that any goodwill bought after April 2019 attracts 6.5% relief is wrong, because of that IP condition, so the buyer should test it rather than assume it.
For the seller, the split sets how much of the gain is goodwill (which, on a qualifying disposal by an individual, can sit within BADR) and how much is tangibles. Because the buyer wants relief-bearing tangibles and the seller wants BADR-bearing goodwill, the apportionment is a negotiation in its own right and should be recorded with a basis, not left as a round number. We work through it in detail in our note on the goodwill and equipment price apportionment, and your practice valuation should support the figures.
Earn-Outs and Deferred Consideration
Many dental deals hold part of the price back. Where the deferred amount is fixed and known at the outset (ascertainable deferred consideration, such as agreed instalments), the full amount is taxed at the disposal even though the cash arrives later. Where the consideration is unascertainable because it depends on future performance (a genuine earn-out), the tax works differently and the heads of terms should flag which one you are agreeing.
On an unascertainable earn-out the seller is treated as receiving, at the date of disposal, a separate chargeable asset: the right to the future payment. This is the Marren v Ingles principle. CGT is charged at disposal on the valued right, then again on a second disposal when the right is satisfied and the cash comes in. Two points matter for planning. First, BADR usually does not reach that second disposal, because the right to payment is not itself a qualifying business asset, so the earn-out element is often taxed at the standard CGT rate rather than the BADR rate. Second, if the eventual payment is less than the value placed on the right, the resulting loss can be carried back against the original gain.
Where the deferred consideration is ascertainable but spread over a period of more than 18 months, instalment relief can let the tax be paid by instalments over up to eight years. The choice between a fixed deferred structure and a performance-based earn-out therefore changes both the rate and the timing of the seller's tax, which is exactly why it belongs in the heads of terms. Our dedicated guide on earn-outs and deferred consideration CGT sets out the mechanics.
Conditions, NHS Contract Novation and the Disposal Date
The conditions in the heads of terms are not just commercial protections. They interact directly with the capital gains tax disposal date, and that date fixes the BADR rate that applies to the gain.
For an unconditional contract, the CGT disposal date is the date of exchange, not the date of completion (TCGA 1992 s.28). For a conditional contract, the disposal date is the date the condition is satisfied. This is the lever behind the 6 April 2026 BADR step. An unconditional exchange on or before 5 April 2026 fixes the 14% rate even if completion follows later, whereas a contract conditional on, say, NHS contract novation will not be treated as disposed of until that condition is met, which may push the disposal into the 18% band. Sellers timing a completion around that rate change need the heads of terms drafted with the conditionality and the exchange mechanics in mind.
NHS contracts are central to this. An asset sale transfers the contract by novation with commissioner consent, and the commissioner can refuse or use the sale to renegotiate value. The heads of terms should make the deal conditional on that consent and set out what happens to the price if the commissioner reduces the contract value. A share sale keeps the contract inside the company so no novation is needed. The timing and consent points are covered in our guide to transferring an NHS dental contract on a practice sale. Beyond the NHS condition, the usual conditions for a dental deal include satisfactory due diligence on the accounts, NHS performance and equipment, finance approval for the buyer, landlord consent for the lease, and CQC registration. If a condition is not met by the long-stop date, either party can walk away without penalty.
Exclusivity, Price Adjustment and the Other Commercial Terms
An exclusivity clause stops the seller negotiating with other buyers for a set window, commonly four to eight weeks, giving the buyer time to complete due diligence and arrange finance without being gazumped. For a dental practice the window should match the realistic time for the work involved, which is longer where there is a large NHS contract requiring novation. Exclusivity and confidentiality are typically the only clauses drafted to bind, so they deserve careful wording even though the rest of the document does not bind.
The price adjustment mechanism is the other term that feeds the tax. A completion accounts approach trues the price up or down against the net assets at completion, while a locked-box fixes the price at an earlier balance sheet date with a leakage clause to claw back value taken out in the meantime. Either way, the final consideration figure flows into the seller's gain and the buyer's base cost and allowances, so the mechanism should be set at heads of terms rather than argued over later. A UDA adjustment, reducing the price if actual UDA delivery falls short of the contract target, is a common dental-specific protection that sits within this clause.
Common Pitfalls in Dental Practice Heads of Terms
A goodwill figure stated without a basis ("goodwill valued at a round sum") is a warning sign, because the valuation method drives both the buyer's relief and the seller's gain. The heads of terms should reference the valuation approach even if the final number is subject to due diligence. Our goodwill valuation and sale playbook explains the methods.
Treating the NHS contract as automatically transferable is another frequent error. It is not, and the deal should be conditional on commissioner consent with a clear route if consent is refused or delayed. Staff and the Performers List also need attention early: TUPE typically applies where the practice transfers as a going concern, and an incoming principal-performer needs to be on the Performers List for the area before completion, which can take several weeks. Finally, leaving out a price adjustment mechanism exposes the buyer where due diligence shows a weaker financial picture than expected.
Practical Steps After Signing
Once the heads of terms are signed, move quickly. Instruct a dental-specialist solicitor and accountant, begin financial due diligence on the accounts, tax returns and NHS performance, arrange finance with a lender that understands dental lending, apply for NHS contract novation where relevant, check the Performers List position, and review the lease. Acting promptly shows the seller you are serious and keeps the deal moving through the exclusivity window. For the buyer's side of the due diligence, see our practice purchase financial due diligence guide.
Final Thoughts
Heads of terms are the document most parties rush, yet they fix the points that matter most for tax: the asset-or-share structure, the goodwill split, the earn-out treatment and the disposal date that governs the BADR rate. None of these is easy to change once the full agreement is drafted. A dental-specialist accountant and solicitor working alongside each other from the heads of terms stage will protect the seller's relief and set the buyer up for the allowances and goodwill relief the deal should deliver.
Every practice sale is different, and the structure that suits one deal can be the wrong answer for the next. Speak to a dental-specialist accountant before signing any heads of terms, so the structure, the timing and the price split all match your personal tax position and your goals. Our dental accountants team works on practice sales from the heads of terms stage onward.