Dental practice owners and medical consultants alike have, for many years, reaped the rewards of incorporating their business and trading as a limited company. The Autumn Statement bought news that took away one of the key tax benefits to the transaction. What now?
How incorporation benefited doctors and dentists
Pre December 2014, established doctors and dentists who had traded for a number of years as a sole trader or partnership could take advantage of specific tax breaks when incorporating their business.
Here, the value of their patient list would be sold to the limited company as “goodwill”, essentially paying the individual or partners for their work to date. Tax was applied to the sale profits, however at the low rate of Capital Gains Tax (10%). It’s broadly the same process as with any commercial business sale.
However, the sole trader or partners typically then become the directors and shareholders of the limited company. So, for all intents and purposes the ownership of the business remains the same.
The directors are able to use the proceeds from the transaction to draw from the business over time, completely tax free; they did pay some tax on the transaction, but at just 10%.
It has for many years been a tax efficient way for dentists and doctors to draw money from their business.
Change in the rate of Capital Gains Tax (CGT)
The 2014 Autumn Statement announced that with immediate effect the rate of CGT is to be increased to 28%.
Therefore, the tax planning method regarding goodwill as detailed above becomes ineffective.
It has caused a rethink amongst specialist dental and medical accountants and financial advisers in how doctors and dentists can continue to save tax and maximise profits despite this news.
Incorporation still has benefits – just reduced benefits
Incorporation is still an option for doctors and dentists who fit certain criteria. It’s best now to seek specialist advice from accountants and financial advisers to ensure it is the right option for you and your business.
Aside from tax reasons, many business owners choose to incorporate their business due to the “limited liability” factor. If the business fails, for whatever reason, the individuals involved are only partly liable. Corporation tax continues to remain low too.
Personal tax planning for doctors and dentists
Paying less tax is always high on the agenda for doctors and dentists when it comes to financial planning.
At Dental & Medical Financial Services we work with specialist dental and medical accountants to ensure you get the best advice all round.
If you were considering incorporation for 2015 then it’s still worth exploring. However, the following are also worth considering for tax efficient financial planning.
- Saving into an ISA – 2015/16 limit is £15,240
- Paying into a personal private pension – the value of the payments invested each year extend your basic rate tax band by the same amount. Good for staying out of higher rate tax!
- Ensuring you are claiming all your business expenses – a specialist accountant can help you here
- Utilise all your tax allowances – this may include capital allowances, annual investment allowances and many more schemes that run periodically.