By Accountancy Director, Ross Martin
After the Dentistry Act 2006, dentists were allowed to incorporate; general industry acceptance took a couple years but since then many practice owners have wisely incorporated, sold their goodwill to their own limited companies, and enjoyed some pretty reasonable tax savings as they drew down personal drawings against that loan account.
I say ‘reasonable’ because many seem to believe that this was the solution to all problems, however, the effective tax rate by using this mechanism was still in the region of 30%. (The company would still pay its 20% corporation tax plus, of course, the original 10% Capital Gains Tax paid on the way in).
Nonetheless, in our opinion, a “no brainer” in nearly all circumstances; if the NHS and the bank would co-operate. It was inevitable though that this tax advantage would at some point come to a conclusion when the director’s loan account ran out. Looking at this pro-actively we, of course, knew this would occur and fore-armed ourselves with a variety of tools to be prepared (or to stop it occurring in the first place).
Over the last couple of years, we have spoken to around a couple dozen practice owners enquiring with us whose tax advisers have, unfortunately, come up empty-handed in providing any mitigating solutions to the completely predictable eventuality – most common advice seems to simply revolve around:
a) Pay the increased tax; or
b) Only take out £40k per annum (£80k with a spouse as well) and leave the rest in the company.
Clearly, neither provide what I would consider helpful advice.
If you have previously incorporated, you may be interested to hear, that due to an accounting “anomaly”, drawing down the director’s loan account over the years effectively leaves ‘profit’ in the company (on paper anyway). It is, therefore, possible to make a reward distribution of this profit (up to the level of the original director’s loan) to top the loan account right back up! And using stalling tactics can mitigate any accompany tax charge.
So, if your original director’s loan was £500k, you would have previously saved in the region of £75k by selling your goodwill, and your circumstances allow you to save a potential further £75k.
To discuss your tax saving options with Ross call01872 300232 or email us at hello@hivebusiness.co.uk.
