Can Goodwill Stripping Reduce Your Dental Practice Tax Bill Before a Sale?

What goodwill stripping actually is

Goodwill stripping means pulling cash out of your dental company before you sell, so that some of the value leaves as a dividend (taxed as income) rather than staying inside the price and being taxed as a capital gain. The hope is that shrinking the sale price shrinks the taxable gain, and that the overall bill comes down.

For most incorporated principals it does the opposite. The reason is the rate gap. A capital gain on a qualifying share sale, within the Business Asset Disposal Relief lifetime limit, is taxed at 18% (2026/27, rising from 14% on 6 April 2026). A dividend taken to extract the same money is taxed at the dividend upper rate of 35.75% (2026/27, up from 33.75% in 2025/26), or 39.35% in the additional band. Moving money from an 18% charge to a 35.75% charge is a tax increase, not a saving, before you even reach the anti-avoidance risk.

This guide sets out the case against the technique, works the current 2026/27 numbers, and explains the one extraction route (employer pension contributions) that is genuinely cleaner.

Why the rate gap usually defeats the strip

Take a dental company with a simplified balance sheet:

• Net assets excluding goodwill: £200,000 (cash, equipment, debtors less creditors)
• Goodwill: £600,000
• Total: £800,000
• Original share base cost: £100,000

Sell clean. The share sale realises £800,000. The gain is £800,000 less the £100,000 base cost, that is £700,000. After the £3,000 annual exempt amount the chargeable gain is £697,000. At the BADR rate of 18% (2026/27), and assuming the £1m lifetime limit is available, the capital gains tax is £125,460.

Strip first. Now suppose you pay yourself a £200,000 dividend out of the company's already-taxed retained profits the year before, dropping the net assets (and so the price a buyer pays) to £600,000. The gain is now £600,000 less £100,000, that is £500,000, less the £3,000 annual exempt amount, so £497,000 chargeable. BADR at 18% is £89,460. But the £200,000 dividend, after the £500 dividend allowance, is taxed on £199,500 at the upper rate of 35.75% (2026/27), which is £71,321. Total tax is £89,460 plus £71,321, that is £160,781.

Stripping turned a £125,460 bill into a £160,781 bill, around £35,000 worse, and that is before HMRC looks at the dividend at all. The retained profits were already taxed inside the company at corporation tax (19% to 25%); the dividend then layers a second, higher charge on top of money that would have come out at 18% had it stayed in the price.

Worked example: a single-principal practice

Consider an incorporated single-handed mixed NHS and private practice. The principal plans to sell in 2027, so the current 2026/27 rates apply. The figures are:

• Normalised EBITDA: £180,000
• Goodwill at 1.0x EBITDA: £180,000
• Net assets excluding goodwill: £120,000
• Total share value: £300,000
• Original share base cost: £10,000

Three routes, all computed at 2026/27 rates with the £3,000 annual exempt amount and BADR at 18% within the lifetime limit.

Option A, sell clean. Price £300,000. Gain £300,000 less £10,000 base cost, that is £290,000, less £3,000 exempt amount, so £287,000 chargeable. BADR 18% is £51,660. Cash kept after tax: £248,340.

Option B, employer pension contribution. The company pays a £60,000 employer pension contribution from trading profit before sale. It is deductible for corporation tax (Finance Act 2004 s.196), so at the 25% marginal rate the company's tax falls by £15,000. No dividend tax and no National Insurance arise, because a pension contribution is neither a distribution nor pay. The £60,000 lands in the pension within the £60,000 annual allowance. The principal still sells the company and claims BADR on the (slightly lower) value, and has moved £60,000 into a pension wrapper without the dividend charge. This route does not convert capital into income, so the anti-avoidance rules below do not engage.

Option C, dividend strip. The principal pays a £100,000 dividend the year before, then sells. The price drops to £200,000. The gain is £200,000 less £10,000, that is £190,000, less £3,000, so £187,000 chargeable. BADR 18% is £33,660. The £100,000 dividend, after the £500 allowance, is taxed on £99,500 at the 35.75% upper rate, that is £35,571. Total tax £33,660 plus £35,571, that is £69,231. Cash kept after tax: £230,769.

Route (2026/27 rates)	Capital gains tax	Dividend tax	Total tax	Cash kept	Anti-avoidance risk
A. Sell clean (BADR 18%)	£51,660	none	£51,660	£248,340	none
B. Employer pension contribution	£51,660 on the sale, less £15,000 corporation tax relief on the contribution	none	lower than A net of the relief	£248,340 plus £60,000 in a pension	none
C. Dividend strip (£100k out, then sell)	£33,660	£35,571	£69,231	£230,769	high (TAAR)

Option C, the actual stripping route, leaves the principal roughly £17,500 worse off in cash than selling clean, and exposed to a counteraction on the dividend. Option B keeps the full clean-sale position and adds £60,000 of pension while reducing corporation tax. The dividend strip is the only route that both costs more and invites a challenge.

The anti-avoidance risk on a pre-sale dividend

The numbers above already make the strip lose on tax alone. HMRC has several tools that can make it worse:

• Transactions in securities (ITA 2007 Part 13). These rules let HMRC counteract a tax advantage where a person receives value from a company in a form (such as a dividend) connected with a sale or reconstruction. A large distribution paid shortly before a share sale, structured so as to reduce what the buyer pays, is the classic target. The counteraction recharacterises the advantage and taxes it as income with interest.
• The company-distributions targeted anti-avoidance rule (TAAR). This sits alongside and targets arrangements whose main purpose, or one of whose main purposes, is to obtain a tax advantage by taking value out in capital or distribution form around a winding-up or sale.
• Value shifting (TCGA 1992 s.29 to s.34). Where value is shifted out of shares before disposal, these provisions can reallocate the gain so the stripped value is brought back into the capital computation.
• Transfer pricing or the settlements rules if value is routed to a connected party, such as a spouse, on non-commercial terms.

The defence to a transactions-in-securities or TAAR challenge is to show the distribution was a genuine, established feature of how the practice was run, not a one-off engineered around the sale. A principal who has paid regular dividends for years has a far stronger position than one who pays a single large dividend six months before exchange. The closer the dividend sits to the sale, and the more clearly it was sized to shrink the price, the weaker the position.

Why employer pension contributions are different

The one pre-sale extraction route that is both cheaper and lower risk is the employer pension contribution. It works because:

• It is deductible for corporation tax on a paid basis under Finance Act 2004 s.196, so it reduces the company's tax bill rather than adding a personal charge.
• It carries no National Insurance, unlike salary or bonus.
• It is not a distribution, so the transactions in securities rules and the distributions TAAR do not reach it.

It is subject to the £60,000 annual allowance (tapered for high earners where threshold income exceeds £200,000 and adjusted income exceeds £260,000), with unused allowance carried forward from the previous three tax years. A principal aged 55 or over, with carry-forward headroom, can move a substantial sum into a pension across two or three years before sale, removing it from the company's value through a deductible cost rather than a taxed dividend.

One caution specific to dentists: a pension contribution into a private scheme is not the same as NHS Pension accrual. If you are an incorporated principal, your dividends are already non-pensionable in the NHS scheme, and salary set low to manage employer NIC limits your officer-route accrual. Pension funding before a sale should be planned alongside, not instead of, your NHS position. For the wider trade-offs of taking value as salary versus dividend, see how a dental company is structured for extraction.

When stripping is occasionally defensible (and when it never is)

A pre-sale dividend is least bad, and most defensible, in narrow circumstances:

• The extraction is part of a genuine, long-running profit-extraction pattern, not a one-off event timed to the sale.
• The timing gap between extraction and sale is wide, ideally 24 months or more, weakening any argument that the two were a single arrangement.
• BADR is unavailable or exhausted, so the gain would be taxed at the main CGT rate of 18% (basic band) or 24% (higher band) rather than 14% or 18%. Even here the dividend upper rate of 35.75% is higher than 24%, so the dividend route still rarely wins.

It is almost never sensible where:

• BADR is available, because you would be swapping an 18% charge for a 35.75% one.
• The dividend is paid close to the sale and sized to shrink the price, because that is exactly what the anti-avoidance rules counteract.
• The company has no distributable reserves: a dividend paid out of capital is unlawful under company law and can be treated as a capital distribution.
• You are a sole trader or partnership, because there is no company and no retained profit to extract this way.

The cleaner alternative: structure for BADR and sell clean

For most principals the better plan is the opposite of stripping: keep value inside the company, make sure the share sale qualifies for Business Asset Disposal Relief, and pay 18% on the gain (14% if you complete an unconditional exchange on or before 5 April 2026). BADR needs the conditions met throughout the two years to disposal, so it rewards early planning rather than last-minute extraction. For the relief itself and the rate timing, see our guide to BADR on a dental practice sale and the detail of what qualifies for Business Asset Disposal Relief.

The choice of sale structure also drives the result. A share sale keeps the gain in the seller's hands and is the usual route to BADR; an asset sale leaves the gain inside the company and adds a second layer of tax on extraction. We compare the two in asset sale versus share sale for a dental practice. And because the size of the goodwill gain depends on how much of the price is goodwill in the first place, it is worth understanding how much of a dental practice price is goodwill before you model any of this.

A pre-sale planning checklist

1. Confirm your target sale date and whether an unconditional exchange before 6 April 2026 is realistic (it fixes BADR at 14%).
2. Check BADR eligibility and how much of your £1m lifetime limit remains.
3. Review distributable reserves before assuming any dividend is even lawful.
4. Model the clean sale at 18% (or 14%) BADR as the baseline before considering any extraction.
5. Where extraction is wanted, test employer pension contributions first, sized to your annual allowance plus carry-forward.
6. If a dividend is still on the table, document the long-running extraction pattern and leave the widest possible gap to the sale.
7. Engage a dental-specialist accountant at least two years before the planned sale.

The headline is simple: for an incorporated principal with BADR available, stripping value out as a pre-sale dividend almost always costs more once the dividend tax is set against the capital gains tax it avoids, and it adds an anti-avoidance risk that a clean sale does not carry.