So you’ve come to the end of your tether with the NHS and having decided to go private, feel as though you are making a break for freedom – no more UDAs, no more dealings with your PCT – you’re liberated!

Aside from providing you with a better quality work life and greater flexibility, you hope that the move to 100% private practice will lead to higher profits. This in turn leads you to wonder if you will save tax if you form a limited company.

This depends largely on the circumstances, so it is essential to carry out a thorough review before committing to anything. In this article we examine the life of a company.

You will need to transfer your business assets to the company. The capital assets will consist of goodwill and possibly freehold.

Freehold - The transfer of freehold leads to stamp duty, so you will probably wish to retain the freehold personally. The company could then pay you rent for using it.

Goodwill – you can deal with this is one of two ways – either gift it or sell it to the company.

If you gift it, you must make an election for capital gains "holdover" relief.

If you sell it, this will be at market value (MV) – therefore you will have made a gain (MV – cost). You must pay capital gains tax (CGT) on this despite the fact that you have not actually received any money. This will be taxed at 10%*, ignoring your annual exemption. Why would you want to do this when gifting the goodwill would lead to no tax payable now? The answer is twofold.

Firstly, if you think that when you retire, it is unlikely that you will be able to sell his shares in the company which would mean the company selling its assets, doing it this way will mean a lower gain for the company in the future. As the company will pay tax at 21% or more but you, CGT of, only at 10%* this is beneficial.

Secondly, as the company (which is a separate legal entity to you) now owes you for the goodwill, you will have a director’s loan account equal to the market value of the goodwill. This means that you can draw this out of the company’s taxed profits – without paying tax on it!

If a company’s profits and gains are under £300,000, it pays corporation tax of 21%. Over £1.5m and it must pay 28%. Anywhere between this, and it must pay a marginal rate of 29.75%. If you do not need more than about £43,500 to live on per annum, what could be done is to simply take this much out of the company as a dividend and leave the rest in the company. Dividends come out of the company’s taxed profits, but if this £43,500 is your only income – you will not have to pay any tax on it! But if you earned £43,500 as a self employed person, the tax on this would be broadly similar to what the company would pay – so why do it this way? The simple answer is, if you can afford not to withdraw funds during the life of the company, but take them all at the end, you may end up only paying 10%* CGT on this. Yes, the company would have paid over 21% - but these two taxes together are still lower than 40% which you may pay now. The problem arises if you do need to draw more money out of the company for living expenses or an unexpected need such as raising finds for a deposit on a house. In this case, over the basic rate, dividends will be taxed on you at 25% and salary at 40% (plus national insurance). This is likely to amount to more tax than as a self employed person on the same income.

There are a huge number of other considerations affecting the dividend/salary ratio, pension contributions, amortisation of goodwill, tax deductibility of expenses etc – but we will have to leave those for another day!

If you have a spouse who plays an active part in the company – he/she could be given a shareholding in the company. This should increase potential tax savings, as part of household income will go to your spouse, meaning you will have two basic rate bands and personal allowances between you, but you must pick a realistic percentage to give them or HMRC will query it. It should not be done purely for tax reasons.

When you want to sell up – you have two options. The best for you is to sell your shares in the company, which will be untouched. You will have made a gain on the sale of shares on which you will pay 10%*. However, it may be that you are unable to sell shares in the company. The buyer may prefer to buy the practice and make a fresh start rather than buying the name and the "history" that goes with the shares. If this happens, the company will pay tax on the gain on the sale of goodwill at 21% or above. The sting in the tail is that when you draw these moneys out of the company, you will pay tax at a further 10%*! This is as opposed to selling your practice as a self-employed person and paying 10%* on the gain! Ouch!

(*Assuming Entrepreneurial relief is available. This reduces capital gains tax to 10% for the first £1m of lifetime gains. Otherwise the rate will be 18%).

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This web-site was last updated on 19/07/2010

Specialist Dental Accountants for over 27 years.

Copyright © 2003-2010 Mac Kotecha & Company. All rights Reserved. The information on this site is for general guidance only. It is essential to take professional advice on specific issues about their impact on any individual or entity. No liability can be accepted for any errors or omission or for any person acting or refraining from acting on the information provided on this site.

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