Buying Out a Retiring Dental Partner: Funding the Share and the CGT and Goodwill Tax

Every partnership eventually faces a partner leaving. Most often it is a planned retirement, but it can also be a move away, a change of direction or, less happily, a dispute. Whatever the reason, the continuing partners usually buy out the departing partner's share so the practice carries on. A buy-out is the mirror image of a buy-in, and like a buy-in it sits at the junction of several taxes, so it pays to understand the moving parts before a partner gives notice.

This guide walks through how a retiring partner's share is valued and funded, the retiring partner's capital gains tax and Business Asset Disposal Relief position, how deferred and staged payments work, the stamp duty land tax angle where the practice owns its premises, and the pension and NHS-contract points. The figures are illustrative and the rates are 2026/27 unless stated.

Why a partner buy-out happens

The commonest trigger is retirement. A partner reaching the end of their clinical career wants to realise the value they have built and hand over cleanly. Other triggers include a partner relocating, reducing their hours to the point where full equity no longer fits, or an irreconcilable difference between partners. The partnership agreement should anticipate all of these and set out how an exit is valued and paid, because the worst time to negotiate the rules is when a partner is already half out of the door.

Valuing the exiting partner's share

The retiring partner's share is valued as their fraction of the whole practice. The building blocks are:

• Their share of goodwill, normally the largest element, valued from normalised profit and a market multiple and then taken at the partner's fraction.
• Their share of tangible assets, the equipment and fit-out.
• Their capital and current account balances, which represent introduced capital and undrawn profit owed to them.

The valuation method should be written into the partnership agreement. Where it is, the exit figure is largely mechanical. Where it is not, exit valuation becomes the single most common partnership argument. Our guide to buying and selling dental practice goodwill covers how goodwill itself is valued, and our guide to partnership capital accounts explains the account balances that have to be settled alongside the goodwill.

How the buy-out is funded

Funding a buy-out is often the hardest practical part, because the continuing partners have to find real money to pay the leaver. The usual routes are:

• A bank loan, taken by the continuing partners or the partnership against the practice's income. Our guide to dental practice bank lending covers how healthcare lenders assess this.
• Retained profit built up in advance, where the retirement is foreseen and the partners have reserved for it.
• Staged payments to the retiring partner, spreading the cost over an agreed period.

Many buy-outs combine a deposit with a loan or instalments. The key is to plan the funding and the tax of it together, because how the money is raised affects the interest deductibility and the cash-flow profile of the practice for years afterwards.

The retiring partner's tax

For the departing partner, the central tax point is capital gains tax on the goodwill and chargeable assets they dispose of on leaving. Under HMRC Statement of Practice D12, the reduction in their fractional share is a disposal of their slice of the partnership's chargeable assets, and the goodwill payment they receive from the continuing partners is the disposal proceeds. The gain is the proceeds less their base cost in that goodwill, which for a long-standing partner may be low or nil, so the gain can be substantial.

The rate depends on whether Business Asset Disposal Relief applies. BADR gives a reduced capital gains rate on qualifying business disposals up to a one million pound lifetime limit per person, where the partner has met the conditions throughout the two years to disposal. The rate is 14% for disposals from 6 April 2025 to 5 April 2026 and 18% from 6 April 2026. Because the rate stepped up at 6 April 2026, the disposal date is a genuine planning lever, and the precise capital gains date is the date of the disposal contract, not necessarily the date of payment. Our guide to the tax of selling a dental practice and exit planning sets out the BADR conditions and disposal-timing rules in full, and they apply equally to a partner's part-disposal on exit.

Deferred and staged consideration on a buy-out

Because buy-outs are often paid over time, the timing of the tax matters. There are two broad cases:

• Fixed consideration paid in instalments. The full amount is taxed on the retiring partner at the date of disposal, even though the cash arrives in stages. Where the consideration is payable over a period of more than eighteen months, instalment relief can let the tax be paid by instalments over up to eight years, which eases the cash-flow mismatch.
• Contingent consideration, or an earn-out. Where part of the price genuinely depends on future performance, the value of the right to that future payment is taxed at disposal, and there is a second tax event when the right is satisfied. Business Asset Disposal Relief generally does not reach that second event, so a contingent element is usually taxed at the standard rate. This is more involved and should be structured with advice.

The distinction between fixed-but-deferred and genuinely contingent consideration changes the tax materially, so the exit deed has to say clearly which it is.

How the buy-out price is structured affects the tax

There is more than one way to get value to a retiring partner, and the structure changes the tax. The cleanest is a straightforward purchase of the leaver's share by the continuing partners, which is the capital gains disposal described above. But practices sometimes reach the same end by other routes, and each carries its own treatment.

• A revaluation of goodwill credited to capital accounts. Where the firm revalues goodwill and credits the uplift to the partners' capital accounts, a subsequent change in shares can still be a disposal under Statement of Practice D12. The accounting entry does not change the underlying capital gains analysis, so a revaluation is not a way to avoid the disposal.
• An annuity or continuing payment to the leaver. Some older partnership agreements provide for a retiring partner to receive a share of future profits for a period. These arrangements have their own income tax treatment and can be far less efficient than a capital sum, so they should be reviewed rather than inherited unquestioned.
• A staged purchase. Buying the share in tranches over a few years, with the disposal recognised as each tranche transfers. This spreads both the funding and, potentially, the capital gains across years.

The right structure depends on the leaver's tax position, the continuing partners' funding and the partnership agreement, which is why the exit is modelled rather than assumed. A capital sum within Business Asset Disposal Relief is usually the most efficient outcome for the leaver, but only if the conditions are met.

The continuing partners' tax

For the partners staying on, buying the leaver's share increases their own fractional holdings. The goodwill they acquire becomes part of their base cost for the future, relevant when they in turn leave or sell. The interest on borrowing taken to fund the buy-out can be deductible, either as a trading finance cost where the partnership borrows for the trade, or as qualifying loan interest for an individual partner under section 398 of the Income Tax Act 2007 where the conditions are met. As always, the principal is not deductible, only the interest, and the borrowing must be for the trade. Our note on practice borrowing explains the interest-deductible-not-principal rule that runs through all of this.

SDLT where the firm owns its premises

If the partnership owns the freehold of the premises, or holds a valuable lease, a change in partnership shares is within the stamp duty land tax code in Schedule 15 of the Finance Act 2003, because the partnership property includes a chargeable interest in land. Any chargeable consideration is worked out by the sum of the lower proportions method. The connection between the continuing partners usually reduces the charge, and a buy-out among connected partners can compute to a low or even nil figure, but it is fact-specific and must be calculated rather than assumed. Where the premises are held outside the partnership, in a separate property arrangement, the analysis differs and should be checked separately.

Pension and NHS-contract points on a partner exit

A partner exit has consequences beyond tax. On the NHS contract, the position depends on how the contract is held. Where the partnership holds it, the partner change is usually managed within the contract with notification to the commissioner rather than a full novation, but this should be confirmed early, because the commissioner's stance can affect timing. On the pension, the retiring partner's NHS pension and the pensionable-pay allocation across the remaining partners should be reviewed with NHSBSA, as a change in partners can shift how pensionable pay is allocated on the contract. Treat both as early checks, not afterthoughts.

The base cost problem for a long-standing partner

One feature of partner buy-outs catches retiring dentists off guard: the size of the gain. A partner who has been in the firm for decades often has a very low base cost in their goodwill share, because goodwill may never have been formally acquired or revalued in their hands, or was acquired long ago at a modest figure. When they finally dispose of that goodwill on exit, the gain is close to the full value received, not just the increase since some recent date.

This is why Business Asset Disposal Relief matters so much on an exit. Without it, a large gain is taxed at the standard capital gains rates. With it, up to the one million pound lifetime limit, the qualifying gain is taxed at 14% if the disposal is on or before 5 April 2026 or 18% from 6 April 2026. The difference on a substantial goodwill gain is significant, which is why the leaver's BADR conditions, the two-year qualifying period and the economic-interest test, should be confirmed well before the exit, not discovered after it. A partner who falls just short of the two-year period, perhaps because of a recent change in their share, can lose the relief entirely, so the timing of any pre-exit share changes deserves care.

Sequencing a buy-out

A buy-out runs more smoothly when the steps happen in a sensible order. A workable sequence is:

• Notice and valuation. The retiring partner gives notice under the agreement, and the share is valued on the agreed basis.
• Confirm the leaver's tax position. Check the Business Asset Disposal Relief conditions and the likely capital gains, and consider the disposal-date sensitivity around the 6 April 2026 rate step.
• Arrange the funding. The continuing partners secure the loan or confirm the reserves and instalment plan, with the interest deductibility checked.
• Deal with the NHS contract and premises. Notify the commissioner where needed, run the SDLT calculation if the firm owns its premises, and confirm the pension position with NHSBSA.
• Complete and settle the accounts. Sign the exit deed, pay or stage the consideration, and reconcile the leaver's capital and current accounts.

Where the partnership agreement already sets out the valuation method and exit terms, most of this is mechanical. Where it does not, each step becomes a negotiation, which is slower and more fraught. The lesson, as ever with partnerships, is that the work done at the agreement stage pays off most when a partner actually leaves.

A worked illustration

Take a three-partner practice where one partner retires and the other two buy out the leaver's third. The continuing partners fund the buy-out with a deposit and a bank loan, with the balance paid in instalments over a few years.

The retiring partner has a capital gains disposal of their goodwill slice under Statement of Practice D12, with the goodwill payment as proceeds. If they meet the conditions, Business Asset Disposal Relief applies at 14% if the disposal is on or before 5 April 2026 or 18% from 6 April 2026, so completing before the step-up could save two points on the qualifying gain. Their capital and current accounts are settled separately, with the current account broadly a repayment of their own undrawn profit rather than a fresh gain. The continuing partners acquire the goodwill into their base cost, deduct the interest on the buy-out loan but not the principal, and run the sum of the lower proportions calculation for SDLT if the partnership owns the freehold. As with every partnership change, the figures depend on the accounts and each partner's history, so the deal is modelled rather than estimated.

Planning ahead and getting advice

The smoothest buy-outs are the ones planned long before they happen. A partnership agreement that sets out the valuation method and the exit terms, a funding plan that anticipates a foreseeable retirement, and early checks with the commissioner and NHSBSA, together turn what can be a fraught and expensive process into a manageable one. Our guide to the incoming side of the same transaction, financing a partnership buy-in, completes the picture, because most buy-outs are paired with a buy-in as the practice renews its ownership.

Before completing, a specialist dental accountant should value the share and model the retiring partner's capital gains and Business Asset Disposal Relief position alongside the continuing partners' funding, and a solicitor should handle the exit deed, the partnership agreement and any property and SDLT steps. A partner buy-out brings together too many taxes and the NHS contract to be handled on a rule of thumb, and the figures are specific to the partners involved.