Tax Planning for Doctors & Dentists
This month Michael Lansdell, from Lansdell & Rose Chartered Accountants, talks about the changes to Entrepreneurs Relief, and why this can affect all business owners, particularly if you are planning your exit strategy.
The views expressed in this article are specifically those of Lansdell & Rose Accountants.
Entrepreneurs Relief – who qualifies?
All business owners should be interested in updates regarding Entrepreneurs Relief (ER) as it reduces the rate of Capital Gains Tax (CGT) to just 10 percent, on qualifying assets.
This said, the rate of CGT has been reduced on most assets to, a favourable 20 percent, in April 2016, so it is understandable why people are not paying quite so much attention to it in recent months.
Regardless though, all business owners that are disposing of assets, should understand the changes that could affect them and to maximise tax savings.
What assets qualify for ER?
The following assets qualify for Entrepreneurs Relief:
- A business owned by a sole trader, or business partner, in full, or part. This includes the business assets after it closes.
- Disposal of shares in a limited company, where there is a minimum 5 percent shareholding and voting right
- Disposal of shares though an Enterprise Management Incentive (EMI) scheme. This applies to transactions after April 2013
- Assets lent to their business or personal company for trade purposes, by the person making the disposal
Typically the word “disposal” refers to a sale of the assets, however liquidation is another possibility, as well as gifting.
To qualify for the Entrepreneurs tax relief, the business must be trading. Therefore, property letting businesses are often not able to claim. Joint ventures can sometimes be tricky too.
The Lifetime Allowance for ER is £10 million, meaning that you claim ER on gains up to this level over the course of your lifetime, without a cap on the number of claims.
What is new with ER that doctors & dentists should know?
In April this year, an important change was made to prevent the continuation of work in the same trade following the winding up of a solvent company and claiming ER.
Since April, it is now not possible to claim ER if you choose to liquidate one company and continue working by setting up another business in the same trade within a two year period.
Subsequently, many directors chose to wind up their solvent companies in March, to work around this change in legislation.
Directors that sell their goodwill and other business assets though their company prior to the liquidation could be affected if they assume just a 10 percent Capital Gains Tax (CGT) liability.
When negotiating a deal for sale, tax planning is now essential so ensure you take sound, specialist advice on your options.
What conditions apply for the business to qualify?
There are several conditions to be adhered to, when it comes to claiming ER. Here are the main ones:
- The business must have been owned at least one year before selling. This applies to sole traders and business partners.
- There is a three year window to dispose of the business assets, to qualify for the relief
- Regarding companies, the seller must be an employee, director or office holder of the company being disposed of
- As mentioned, the disposer needs to have held at least five percent of the company’s shares and voting rights, subject to the EMI rule.
As you can see, it gets complicated and certain criteria needs to be met.
For doctors and dentists planning their exit strategy, keeping up to date with tax planning around the various reliefs available on the disposal of assets is vital.
More Tax Saving Tips for Doctors & Dentists
- When is the right time for your practice to go Limited?
- 10 Tax free benefits for employees
- Capital Gains Tax Update
- How the new dividend rules affect you
- Inheritance tax update