Selling the practice?

One of the key issues centres on how best to plan tax liability

26 February, 2024 / professional-focus
 Jayne Clifford  

In our experience it is never too early to consider financial planning and while ‘younger’ principals may not place this at the top of the agenda right now, the reality is that planning at an early stage can be structured to help with current tax liabilities as well as those on retirement or sale.

Don’t hand the tax man a blank cheque

Both CGT and IHT need to be considered carefully as part of the planning exercise and examined in close detail – without appropriate planning for these two very real scenarios practice owners might find themselves or their ‘estate’ handing a blank cheque to the tax man. CGT is payable when you sell an asset, for example, premises or a dental business, and there has been an increase in the value of the asset.

Currently, CGT rates on most gains are 10 per cent for basic rate taxpayers and 20 per cent for higher rate taxpayers. Furthermore, where you sell a business asset – such as a dental practice – Business Asset Disposal Relief can reduce the tax rate to 10 per cent on the total gain.

However, there are exceptions: for example, gains from the sale of a residential property that does not qualify for principal private residence relief continue to be taxed at 18 or 28 per cent. CGT liabilities can be reduced by utilising the tax allowances to which you are entitled and by careful planning of your CGT position throughout your life.

If you leave it too late to consider your CGT liabilities, especially if you are planning to sell investments made many years ago, it can be quite a shock to realise how large the CGT liability can be. You can also offset capital gains on successful investments with losses from investments that haven’t worked out so well.

Losses can also be carried forward to offset gains in future tax years and equally important is the use of your Annual Exempt Amount (AEA). See our Tax Rate Card on for the current rates and allowances.

A will is a very effective tax planning tool

Moreover, a priority for any practice owner should be the setting up of a will as the first step in any estate planning exercise, not only to make certain that matters are dealt with in a tax-efficient way, but to ensure that your exact wishes are carried out. Having a will means you avoid relying on the intestacy rules that come into play where there is no will. Effectively the law decides what happens to the estate – remember the point above about writing a blank cheque to the tax man! This can lead to financial anxiety for the surviving spouse/ family along with a possible immediate charge to IHT.

Consider setting up a trust

If you don’t want to give directly, you could consider a trust. With a little planning, you can transfer the asset(s) into a trust with minimal CGT or IHT consequences and it can also reduce your taxable estate. There are, however, some additional tax charges and costs related to trusts that may be applicable. If you are interested in setting up a trust, you should have a conversation with your accountant/ lawyer first to ensure that setting up a trust will meet your requirements.

Know your allowances and reliefs

Everyone has an inheritance tax (IHT) Nil Rate Band of £325,000 and this will remain frozen until 2028. In addition to the main nil-rate band, the Residence Nil Rate (RNRB) came into force in April 2017. The maximum RNRB allowance is £175,000, which effectively raises the IHT free allowance to £500,000 per person. Where married couples jointly own a family home and wish to leave this to their children, the total IHT exemption is now £1m. Business Property Relief can, with careful planning, remove the full value of a dental business – sole trader, partnership, or shares in private company – from being subject to an IHT charge, either via lifetime gifts or on death. You can also gift as many assets as you wish during your lifetime, in what is referred to as a ‘potentially exempt transfer’. Should you survive for seven years from the gift, the assets will be completely outside your estate.

Acts of benevolence have a double impact

Gifting income-producing assets to your children, such as shares in the family business or an investment property, may also be a good way of reducing the overall family income tax bill whilst at the same time conducting succession planning. Do take care to ensure there are no income tax consequences or CGT/ IHT liabilities that crystallise on the gift/transfer. Remember always to seek professional advice.

Tags: Martin Aitken

Categories: Magazine / Professional Focus

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