The buying and selling of a dental practice typically involves the buyer getting a bank loan to pay the seller. Yet banks are not the only option for financing the purchase; there is an alternative way that can be more mutually beneficial for both the buyer and the seller.
The traditional finance route when buying a dental practice
If you get a bank loan to pay for the dental practice you are buying, you repay the loan over a set term at an agreed interest rate. Simple and very familiar – it’s the same when you get a mortgage to purchase your house.
With a bank loan, the seller simply gets the agreed amount of money from the buyer as one lump sum. There is, however, an alternative method which takes out the bank as the ‘middleman’ and generates a tax free monthly income for the seller.
Whilst this alternative method may not be an attractive option for everyone, it is a finance route that:
- benefits both the buyer and the seller on an ongoing basis and,
- is at least worth exploring so that you know what all your options are before you choose the best one that suits you.
An alternative finance route when buying / selling a dental practice
In essence, the seller replaces the traditional bank as the lender. An agreement is made for the seller to provide a loan to the buyer at an agreed interest rate and term; let’s say £300,000 at 4% over bank base rate for a period of 15 years, with a monthly payment of £2,295pm.
The seller receives a tax free monthly income equivalent to the amount of the loan repayment – £2,295pm in our example – with only the interest element of the loan attracting tax at the seller’s prevailing income tax rate.
For even greater tax efficiency gains, the tax charge on the loan’s interest element can be reduced by utilising other investment strategies, some offering up to 30% tax relief.
To give security to both the seller and the buyer’s family, the loan is protected by a life / critical illness policy that is taken out by the buyer and placed in trust to the seller. This protection policy ensures that the loan is repaid in the event of death or critical illness during the term of the loan.
It’s a win:win situation…
The buyer gets the loan they need to pay for the dental practice; the seller gains a valuable and potentially very tax efficient income in retirement which they have total freedom to either spend as income or invest for a rainy day.
How does it affect the seller’s tax liability?
As the seller, you will be selling a significant asset that may include a combination of goodwill and property assets. The sale will also likely generate a Capital Gains Tax (CGT) liability.
This CGT liability:
- Is normally reported and paid via your self-assessment tax return for the tax year that the sale took place;
- Will need to be paid as one lump sum; it cannot be spread over the length of the buyer-seller agreement.
When calculating your CGT liability, don’t forget that you have a personal allowance of £11,100 before you have to pay a penny in CGT.
It’s also always advisable to speak to your accountant to check your eligibility for entrepreneur’s relief. Why? Because you could potentially pay a lower rate of tax on the gains. For example, if you are a higher rate tax payer who is eligible for entrepreneur’s relief you will only pay 10% on the gains instead of the normal 20% CGT.
The pros, cons and your options
There are undeniably pros and cons to the various finance options dentists have when buying and selling a dental practice. There are also of course many other investment options that provide a tax free income with additional tax relief benefits.
To really know what all these pros, cons and your options are so that you make the right decision for you and your individual circumstances, we strongly recommend you get specialist legal and financial advice before doing anything.
Have you heard of the seller of a dental practice also being the lender of the money used to pay for the purchase? Let us know by adding a comment below.