Jenna Taylor explains how a poorly structured dental limited company can become a costly mess.
Dentists who opt to run their dental practice through a limited company should be ready to invest in good advice on its setup. Structure your company in the wrong way and you may later find you are involved in a costly and complicated mess, with the penalty of additional tax.
If you are new to incorporation, there are important questions to be answered. Among them are:
- What kind of status should the company have?
- Is it a trading operation or an investment company?
- Who will the shareholders be?
- What percentage of shares will you allocate to the people you nominate as shareholders?
Remember, all assets held in the company belong to the company, not to the dentist. We make sure our clients structure their companies in their long-term interests to allow for a streamlined sale of the business when the time comes.
By contrast, there are dentists who have opted to set up an ‘off-the-shelf’ company without taking any advice. When they decide to sell their dental practice, they discover that their lack of forethought means their dental practice may need to restructure. We have taken on a few such dentists, who we refer to as our ‘in extremis’ clients while we get them sorted.
Here are two case studies that reflect the two polar extremes.
Dentist A: the smooth exit
Because dentist A incorporated her practice with our help some years ago, she structured her company correctly from the outset. It was a trading company in which she owned the majority shareholding while her husband was also a significant shareholder.
We had already discussed her exit strategy and knew her priorities. We had also worked with her independent financial adviser, so we understood the bigger picture. More recently we had made her aware of business asset disposal relief (BADR). This allows capital gains tax to be paid at 10% on the first £1m of lifetime gains on business assets rather than the usual rate of 20%. There are strict requirements for BADR, one being the business must be a trading business and not an investment company.
When dentist A sold her practice, she went straight to market and promptly found buyers.
Dentist B: ‘in extremis’
A problem can occur when a dentist uses surplus cash in the company to make investments. This was the case with dentist B, who had some spare funds in their limited company and decided to buy a residential property as an investment. Surplus cash had also been placed in an investment bond within the company.
It was only when their incorporated dental practice was on the market that their practice sales agency realised that the company needed restructuring, or the dentist would have to sell the investment property and investment bond along with the practice.
This was doubly problematic, as the dentist had planned to retain both the investments into retirement. Also, if the two investments stayed within the company, their entitlement to BADR would be compromised and they would incur additional tax.
We were happy to assist, of course. It was not as simple as just removing the properties from the business, as the restructuring had to be undertaken correctly and observe certain time restrictions. We managed to sort out the dentist happily, but had their company been properly structured from the outset, they would have avoided costs and stress and a potential delay to their practice sale.
Structure correctly at the start
As business advisers, our view is that our dentist clients should ideally plan and structure a company at the outset to achieve considerable tax savings and a smooth and well-managed exit.
Those that did not structure their company correctly should take steps to do so at least five years before their intended retirement to avoid a stressful and costly last-minute restructure.
This article first appeared in Private Dentistry magazine. To receive a copy, sign up to Dentistry Club.
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