Succession Planning for Dental Practice Owners: Internal Transfer Routes and Tax

Why Choose an Internal Transfer Over an Open-Market Sale?

Most dental practice exit guides focus on selling to a third party, whether a corporate group, a fellow dentist or a private-equity-backed buyer. But for many owners, the goal is not the highest open-market price: it is keeping the practice within the family or passing it to a trusted clinical team member who has grown with the business. An internal transfer, to a son or daughter, a long-standing associate, or a management buyout team, is a fundamentally different transaction from a commercial sale, with a different tax architecture to match.

Two tax dimensions dominate an internal transfer. The first is capital gains tax: in a gift or below-market transfer, the owner disposes of an asset at market value under TCGA 1992 s.17, triggering a CGT charge as if a commercial sale had taken place, unless gift holdover relief under TCGA 1992 s.165 is claimed. The second is inheritance tax: a lifetime gift of practice assets is a potentially exempt transfer (PET) for IHT purposes, so the 7-year clock and the business property relief rules sit alongside the CGT analysis. A third, operational dimension is the NHS contract: an asset gift requires novation to the new owner, while a share gift avoids that entirely.

The internal transfer decision is therefore not just a CGT question and not just an IHT question. It is a three-dimensional planning exercise, and the right structure depends on the owner's personal position, the value of the practice, the recipient's plans for it, and how many years the owner has before they step back.

The Four Internal Transfer Routes Compared

There are four principal routes for passing a dental practice to the next generation or to the clinical team. They differ sharply on their tax mechanics, their NHS contract consequences, and their practical difficulty.

Route	Tax mechanism	NHS contract impact	Typical timeline	Practical difficulty
Family gift	CGT via s.165 holdover or BADR election; IHT via PET and BPR	Novation required (asset gift) or none (share gift)	Immediate or staged	Low paperwork if well-planned; high risk if not structured
Associate buy-in	Arm's-length price; CGT on seller at BADR rates; s.398 loan interest for buyer	Novation or partnership share change	12 to 36 months	Commercial negotiation; financing required
Management buyout	As buy-in; structured earn-out if deferred consideration	Depends on structure	12 to 24 months	Financing and governance complexity
Partnership transition	SP D12 part-disposal; ITTOIA 2005 s.850 profit transparency	Contract stays with partnership	Multi-year gradual transition	Partnership deed; profit-share renegotiation

If the successor is buying in commercially rather than receiving a gift, the mechanics of the commercial earn-in, including the section 398 loan interest deduction on acquisition borrowing, the SP D12 CGT on goodwill reallocation between partners, and the SDLT calculation on a partnership interest where land is involved, are covered in detail in the dental partner buy-in financing and tax guide.

If the structure is a buy-out rather than a gift, including the CGT on the outgoing partner's share and the mechanics of staged payments, the retiring partner buy-out tax guide covers the outgoing partner's position in full. This page focuses exclusively on the gift and family-transfer route, where holdover relief and IHT/BPR are the controlling dimensions.

Gift Route: How TCGA 1992 s.165 Holdover Works

When a dental practice owner makes a gift of business assets or company shares, TCGA 1992 s.17 deems the disposal to take place at market value, even if nothing is paid. Without a relieving provision, the owner would face a full CGT charge on the open-market gain on the day of the gift. Gift holdover relief under TCGA 1992 s.165 suspends that charge: the gain is "held over" and the recipient takes the asset at a reduced acquisition cost equal to the market value minus the held-over gain.

What Assets Qualify

Holdover is available on two categories of asset. First, assets used for the purposes of a trade, profession or vocation carried on by the transferor: this covers the goodwill, premises, equipment and other trading assets of an unincorporated dental practice. Second, unlisted shares or securities in a trading company or in the transferor's personal company (broadly, a company in which the transferor holds at least 5% of the voting rights): this covers shares in a dental company held by the owner.

Where the transfer involves both business and non-business assets (for example, a gift of both the practice and a surgery property that is partly let to a third party), the held-over gain is restricted to the proportion of the asset's use that qualifies for business purposes. A mixed-use property will give only partial holdover, and the non-business element will crystallise CGT in the giver's hands on the day of the gift.

The Joint Claim and the HS295 Form

Holdover relief is not automatic. Both the giver and the recipient must make a joint claim using the HMRC holdover relief form (available with helpsheet HS295 on gov.uk). The HMRC capital gains manual reference for s.165 holdover is CG66880. If the recipient is the trustee of a settlement rather than an individual, the giver can claim alone. But where the recipient is an individual family member, both signatures are required. This is a practical point that sometimes gets missed in family arrangements: the gift needs both parties actively engaged in the paperwork, and the claim must be made before the relevant tax returns are submitted.

What the Recipient Inherits

The recipient's acquisition cost is the market value of the asset at the date of the gift, reduced by the amount of the gain held over. In practice this means the recipient takes on the giver's historic cost base (in many cases a very low figure, especially where goodwill was built from scratch with a nil base cost). CGT is not cancelled: it is deferred and passes to the recipient. When the recipient eventually sells, they will pay CGT on the full gain from the giver's original cost, including all the appreciation during the giver's ownership. Whether that deferred tax ultimately costs more or less than paying CGT at the time of the gift depends on the recipient's future exit rate, the length of the hold, and rate changes in the interim.

The s.165(3)(ba) Company-Transferee Block

TCGA 1992 s.165(3)(ba) contains an important trap: holdover relief is not available where the transferee is a company. If a practice owner gifts shares to their child personally, holdover is available. If the plan is for a company controlled by the child to receive the shares instead, the relief does not apply. This is a common structuring error in practice succession: the personal-to-personal route preserves holdover; routing through an intermediary company does not.

Holdover vs BADR: The Core Planning Decision

The holdover-vs-BADR decision is one of the most consequential choices in a family transfer, and there is no universal right answer. The two options work as follows, using a worked example.

Dr Patel owns 100% of a dental company. He gifts the shares to his son. The market value of the shares is £800,000 and his acquisition cost is £50,000, giving a chargeable gain of £750,000. He qualifies for BADR (18% from 6 April 2026 on the first £1m of qualifying gains under the lifetime limit; see our detailed guide on what qualifies for Business Asset Disposal Relief).

Option 1: Holdover under s.165. Dr Patel pays no CGT on the gift. His son acquires the shares at £800,000 less the £750,000 held-over gain, giving an acquisition cost of £50,000. When his son sells in, say, ten years at £1,200,000, the gain is £1,150,000. If his son qualifies for BADR independently and the rate is still 18%, CGT is £207,000. If BADR is not available or the rate has risen, the bill could be materially higher.

Option 2: Pay BADR now at 18%. Dr Patel pays CGT of £135,000 (£750,000 at 18%). His son acquires the shares at full market value (£800,000) under TCGA 1992 s.17 because no holdover was claimed. When his son sells at £1,200,000, the gain is £400,000 and if BADR applies, CGT is £72,000. Total tax across both disposals: £207,000. But Dr Patel has used £750,000 of his £1m BADR lifetime limit, leaving only £250,000 for any other qualifying disposal.

On these numbers the total tax is the same, but the factors that tip the balance include: (a) whether Dr Patel has other qualifying disposals he needs his BADR limit for; (b) whether CGT rates rise beyond 18% before the son sells, which would make paying now at 18% more attractive; (c) the time value of deferring £135,000 for ten years, which favours holdover; and (d) whether the son will independently qualify for BADR on his eventual disposal. This is a modelling exercise, not a prescription: the right answer requires running both scenarios with the actual figures and assumptions that apply to the specific family situation.

IHT Business Property Relief on the Practice

For most dental practice owners, the practice is also their most significant IHT-exposed asset. Business property relief (BPR) under IHTA 1984 s.105 provides relief against IHT on qualifying business property, provided the owner has held it for at least two years immediately before the transfer (s.106). An unincorporated dental practice run as a sole trader or partnership normally qualifies as relevant business property under s.105(1)(a). Shares in an unquoted dental company qualify under s.105(1)(b). The relief also extends to the practice premises under s.105(1)(d) where the premises are used wholly or mainly in the trade and form part of the same interest as the business, though the exact classification is fact-specific and should be confirmed with a specialist adviser.

The FA 2026 Reform: The £2.5m Cap

Before 6 April 2026, 100% BPR on qualifying business property was uncapped. A practice worth £5m, £10m or more could pass free of IHT on death or as a qualifying lifetime transfer. FA 2026 Schedule 12 fundamentally changed this picture. From 6 April 2026:

• 100% BPR is available on the first £2,500,000 of qualifying business and agricultural property per person (the "£2.5m allowance").
• Value above the £2.5m allowance attracts 50% BPR, meaning half the excess is chargeable to IHT at 40%, giving an effective rate of 20% on value above the threshold.
• The allowance is indexed from 6 April 2031 by CPI, rounded to the nearest £1,000.
• The allowance operates on a rolling 7-year basis: it is reduced by any qualifying transfers made in the 7 years before the current transfer.

The HMRC comprehensive BPR guidance index is at IHTM25000. The comprehensive index includes the conditions for relevant business property, the ownership requirements, and the s.113A PET clawback provisions.

Worked Example: £3.2m Practice and the £2.5m Allowance

Dr Jones owns an unincorporated dental practice. The business assets (including goodwill) are valued at £2.0m and the surgery freehold at £1.2m. Total: £3.2m. She has made no prior qualifying BPR transfers in the last 7 years. She gifts the whole practice to her daughter on 1 May 2026.

If Dr Jones survives 7 years, there is no IHT on the gift. If she dies within 7 years and her daughter still holds the qualifying business property (as required by IHTA 1984 s.113A, discussed below):

• £2.5m at 100% BPR = nil IHT on the first £2.5m.
• £700,000 above the allowance: 50% BPR reduces the chargeable value to £350,000.
• IHT on £350,000 at 40% = £140,000 (before taper relief if applicable).

Note: whether the full £3.2m qualifies under s.105(1)(a) (as a sole proprietorship interest) or whether the freehold falls separately under s.105(1)(d) depends on the specific asset composition. The figures above assume all assets qualify at 100%. The exact apportionment is a fact-specific question and a specialist adviser should confirm the classification, particularly where the freehold is held on a separate title from the trading business. For background on how goodwill is valued in a dental practice transaction, see the goodwill and practice sale guide.

The s.112 Excepted Assets Trap

BPR does not apply to excepted assets under IHTA 1984 s.112: assets that are neither used wholly or mainly in the business nor required for future business use. A practice that holds a significant investment portfolio within the business entity, or property that is not used in the trade, may have a portion of its value excluded from BPR. This is a risk for practices that have accumulated cash or investments within a company structure. Ensuring the practice entity does not hold non-trading assets that taint the BPR position is part of the pre-transfer planning review.

The PET 7-Year Rule and the s.113A Condition

A lifetime gift of practice assets or company shares to an individual is a potentially exempt transfer for IHT. If the giver survives 7 full years from the date of the gift, it falls entirely outside IHT. If the giver dies within 7 years, the gift becomes a chargeable transfer and IHT is assessed using the nil-rate band (£325,000 in 2026/27) and, where applicable, BPR.

Taper Relief

Where the gift is made between 3 and 7 years before death, taper relief reduces the additional IHT charge (the charge on the value above the nil-rate band) at the following rates:

Years between gift and death	Reduction in additional IHT charge
0 to 3 years	0% (no taper)
3 to 4 years	20%
4 to 5 years	40%
5 to 6 years	60%
6 to 7 years	80%

Taper reduces the charge on the excess above the nil-rate band, not on the value of the gift itself.

The s.113A Donee-Must-Hold Condition

BPR on a failed PET does not apply automatically. Under IHTA 1984 s.113A, BPR is only available if the donee has owned the original qualifying business property (or qualifying replacement property) continuously from the date of the gift to the date of the transferor's death, and the property still qualifies as relevant business property at the date of death. A recipient who sells the practice before the donor dies, and does not reinvest in qualifying replacement business property, loses BPR on the failed PET entirely.

Worked Example: The Failed PET Trap

Dr Singh gives away his unincorporated practice (value £1.8m, all 100% BPR-qualifying) to his daughter in June 2026. He dies in November 2029, 3 years and 5 months after the gift. His daughter sold the practice in February 2029, before his death, and has not reinvested in qualifying replacement property.

Because the daughter no longer holds qualifying business property at the date of Dr Singh's death, BPR under s.113A does not apply. The full £1.8m is a failed PET. After applying the nil-rate band of £325,000, the excess is £1,475,000. The baseline IHT charge is £590,000 (40% of £1,475,000). With 3 to 4 year taper relief (20% reduction), the charge is reduced to £472,000. The planning lesson: a gift of a business that the recipient then sells before the donor dies is the classic s.113A trap. A business gift made with the intention of an early resale by the recipient provides little or no IHT shelter on a failed PET.

Death vs Lifetime Gift: The Core Trade-Off

The decision between making a lifetime gift now versus holding the practice until death involves two tax mechanisms pulling in opposite directions.

A lifetime gift (with holdover) defers CGT and starts the 7-year IHT clock immediately. If the owner survives 7 years, the IHT on the gift is eliminated entirely. The CGT cost is deferred to the recipient's eventual disposal. But the recipient takes a low holdover base cost, losing the benefit of the CGT uplift on death.

Holding until death preserves the TCGA 1992 s.62 CGT uplift: assets passing on death are deemed acquired at market value at the date of death, and the deceased is not treated as making a disposal. All the CGT that accrued during the owner's lifetime is extinguished entirely. The beneficiary starts with a fresh market-value base cost and only pays CGT on future appreciation. However, the IHT 7-year clock never started, so the full estate (including the practice) is assessed for IHT at death, with BPR applying under the post-6 April 2026 rules (£2.5m at 100%, 50% above).

The interaction of these two reliefs, CGT uplift on death and BPR, creates a planning tension for larger practices. A practice worth £4m held until death gets: CGT uplift (wiping out lifetime CGT) and BPR (£2.5m at nil, £1.5m at 50%, so £750,000 chargeable at 40% = £300,000 IHT). A lifetime gift with holdover and 7-year survival gets: no CGT on the gift, no IHT on survival, but the recipient inherits a low base cost and will pay CGT on the full appreciation when they sell. Whether the CGT uplift on death is worth more than the 7-year IHT exemption is a calculation that turns on the size of the practice, the assumed growth rate, the recipient's planned holding period, and future CGT rates. Frame this as a planning decision to model with an adviser, not a formula to apply universally.

NHS Contract: Novation Risk and the Share-Gift Advantage

For NHS-contracted practices, the route of transfer has an operational dimension that is as important as the tax dimension. An asset transfer, including a gift of the practice as a going concern, transfers the practice assets but not the NHS contract. The contract stays with the original contractor. To allow the recipient to operate under the contract, the commissioner must approve a novation, which is a formal change of contractor. Commissioners have discretion over whether to approve novation, and they may use it as an opportunity to renegotiate the per-UDA value or the contract terms. Historically, reductions of 5 to 10% have been seen at novation, which on a significant contract represents a material reduction in the value transferred.

A share transfer avoids novation entirely. If the practice operates through a limited company and the donor gifts the shares in that company to the recipient, the company (and the NHS contract within it) is unchanged. The contract stays inside the legal entity; no novation is required. For an NHS-heavy practice, this is often the strongest operational argument for incorporating before an internal transfer. The tax treatment of each structure, including the no-novation advantage of a share transfer, is covered in the asset sale vs share sale guide.

Incorporating an unincorporated practice before a share gift requires TCGA 1992 s.162 incorporation relief to roll over the CGT on the transfer of assets into the company. Once incorporated, the BADR qualifying period for the shares starts running from the date of incorporation (at least 2 years of continuous share ownership is required for BADR on a share disposal). The pre-transfer planning window of 3 to 5 years is therefore important for owners who want both the share-gift novation advantage and the ability to elect for BADR on a partial consideration transfer.

Pre-Transfer Planning: A 3 to 5 Year Checklist

The mechanics of a family transfer are relatively straightforward once the structure is decided. The harder work happens in the years before the transfer takes place. For a 3 to 5 year planning horizon, see also the exit planning timeline guide, which covers the wider corporate and tax preparation steps. For a family transfer specifically, the following should be on the pre-transfer list:

• Corporate structure review. Is the practice incorporated? If not, and if a share gift is preferred (for novation-avoidance or CGT reasons), incorporate now using s.162 relief. The 2-year BADR qualifying period for shares starts from the incorporation date.
• Start the PET clock. A gift made today starts the 7-year IHT clock now. A gift made in 5 years' time starts it 5 years later. The earlier the gift, the earlier the 7-year period runs off, assuming the donor survives.
• Check the BADR lifetime limit. If the owner has used some or all of their £1m BADR limit on prior disposals, the holdover route becomes more attractive regardless of the rate comparison (there is no lifetime limit on holdover).
• Confirm the 2-year BPR ownership condition. The practice must have been owned for at least 2 years immediately before the transfer for BPR to apply (IHTA 1984 s.106). Confirm that the entity structure and asset ownership history meet this condition, particularly if the practice has recently changed structure.
• Review excepted assets. Ensure the practice entity does not hold investment assets or non-trading property that would be excluded from BPR under s.112.
• Commission a professional valuation. The market value of the practice at the date of the gift is the figure that drives both the CGT calculation (if BADR is elected) and the IHT PET value. An RICS or dental-specialist valuation provides the anchor figure for both sets of computations.
• Confirm BADR qualifying conditions on the shares. If the plan involves a share gift with a BADR election (paying CGT now rather than holding over), the 5% shareholding, 5% voting rights, officer or employee, and 2-year qualifying period conditions must all be met at the date of the gift. The full conditions are set out in the BADR qualifying conditions guide.

When Internal Transfer Is Not the Right Route

The internal transfer route is not right for every owner or every practice. There are circumstances where the open-market sale remains the better answer:

• No willing or capable successor. If there is no family member or clinical team member who is ready, willing and financially able to take on the practice (even as a gift), the internal route is not available. A forced internal transfer to an unprepared successor can destroy value faster than any tax saving.
• Open-market value materially exceeds the family buyer's capacity. A gift reduces the tax cost but does not reduce the practice's capital value in the owner's estate unless the 7-year period runs. Where the owner needs the sale proceeds to fund retirement, an internal transfer at nil or reduced consideration may simply not be financially viable.
• NHS contract risk is prohibitive. For an unincorporated practice with a very large NHS contract, the novation risk (commissioner discretion, potential renegotiation, a period without an active contract) may make an asset gift impractical. In such cases, incorporation followed by a share transfer is the planning route to resolve that risk, not an alternative to the internal transfer altogether.
• Holdover and BPR do not fully shelter the gain and estate. For a practice worth significantly more than £2.5m and where the owner is likely to die within 7 years, the combined CGT and IHT exposure on an internal transfer may approach or exceed the net-of-tax proceeds of a carefully structured commercial sale. Running both scenarios with a dental-specialist accountant is essential before committing to the internal route.

In every case, the internal transfer decision sits alongside the commercial market. The gap between what the open market would pay and what a family buyer can accept, or what a gift saves in tax, is the central number to model before the structure is fixed.