Reduced tax benefits for new incorporations – what now?

The news from the recent Autumn Statement that Capital Gains Tax on incorporation was to be increased from 10% to 28% with immediate effect, took much of the fun out of the party for what had for many years been a key part of tax planning benefit when incorporating medical consultants and dental practices. Whilst the news doesn’t affect those already trading as a limited company, it affects those sole traders and partnerships that were either part-way through the exercise to switch to a limited company, or who were still considering it in future, who have essentially missed the boat.

The benefits of being “limited”

For commercial reasons, trading as a limited company means that you personally have only a “limited” responsibility for the liabilities of the business, so if things don’t go well, for whatever reason, then you are less likely to find yourself in personal financial difficulty than if you trade as a sole trader or partnership, where you are wholly liable. Corporation tax is soon to fall by 1% to 20% and these are expected to remain low if the current government make it through the up and coming election. These benefits remain. This wasn’t though the only reason why dentists and doctors chose to trade as a limited company.

Incorporation for tax savings

Until the news by the Chancellor back in December 2014, sole traders and partnerships could effectively, and legitimately, sell the value of their “goodwill”, which can broadly be described as the patient list, to the new limited company upon set up. After all, the individual (sole trader) or group of individuals (partnership) had worked hard over the past years to build the business to the level it is today, creating a value for their efforts (goodwill) to which they can now “cash in”. The same would apply under normal commercial terms. The difference with this transaction is that the ownership of the business stays the same. The sole trader becomes the shareholder in the new limited company, as the partners become the shareholders in the new limited company, with everyone holding shares so that income can be withdrawn from the company in a tax efficient way. Any profit on the goodwill value in the sale transaction was subject to Capital Gains Tax (CGT) for the doctor or dentist personally, but at just 10%. In exchange the doctor or dentist in their new position as company director had a pot of funds they could draw down over time, completely tax-free (as the tax had already been paid under CGT). Since the rate of CGT has now increased to 28% this has resulted in a rethink across the board for how tax savings can be maximised when incorporating

Continue to avoid tax avoidance schemes

If you look hard enough you will find various tax planning schemes but many are on the HMRC radar as “tax avoidance schemes” and are not advisable, especially if you are not a risk taker.

Robust tax planning for 2015

Figurit help hundreds of doctors and dentists with tax planning every year. Here is a summary of other effective tax planning strategies:

Incorporation

This is still very much a viable option for many doctors and dentists; the feasibility of it needs to be reconsidered before moving forward, taking into account this change in the law relating to the sale of the goodwill

Claim all your business expenses

Whilst a simple tip, ensuring that you are correctly claiming the maximum tax relief for your business will save tax in the short and long term. Using accurate software to record your income and expenses will help with this too.

Invest into a personal pension

Tax relief can be claimed on payments into a personal pension fund and with new rules coming into place from April 2015 providing more flexible terms regarding the extraction of pension funds, it could be an attractive option.

Invest into an ISA

ISA’s are a tax-free way to save money for your future. Utilising the allowance of £15,240 (15/16) is definitely worth consideration.

Utilise all your allowances

Including:

Specialist tax planning for doctors and dentists

The most effective way to save tax is to speak with a tax advisor, as whilst generic advice can be applied, everyone’s situation is different. If you are in the position now where Incorporation was on the horizon and you are confused what to do next to minimise your tax bill, contact us today and we can help with generating ideas for specialist tax planning in 2015. T: 020 7376 9333 E: info@lansdellrose.co.uk

Related articles

How the 2014 Autumn Statement affects you  Tax: Pensions and Savings following the Autumn StatementPensions – Autumn Update 

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