There are various tax reasons why a dentist would choose to incorporate his practice. These are, of course, generally accountant driven, and the new 45% tax rate will undoubtedly fuel the tax reasons.
Property issues once the company is incorporated and the primary care trust has agreed to the transfer of the PCT contract, the practice must be transferred from the practice owner to the company.
This will entail a sale agreement and a document dealing with the property. The sale agreement will provide for the transfer of the goodwill and the equipment at market value. This value, say £800K, will not actually be paid. It will be left on ‘loan account’ as a sum due by the company to the practice owner. The practice owner should be able to take this capital sum out of the company, over a period of time, without paying income tax or NIC on his receipts.
It is received wisdom that freehold property is not transferred into the company. If it is not held by (or transferred into) a self invested personal pension, it would normally be retained by the practice owner and a commercial lease granted to the company.
In the case of the transfer of freehold property, the consent of the lender will be required. The lender may simply agree to redeem the mortgage and simultaneously offer an identical mortgage to the company. In the current economic climate, the lender may insist that the company pays a materially higher rate of interest than was payable prior to the re-organisation. This is another reason not to transfer the property into the company. That said, the same debt issues apply to transferring the property into a SIPP.
If the property is leasehold, the lease would normally be transferred to the company. The consent of the landlord will be required for the assignment of the lease. As the company will not have a trading history, the landlord will almost certainly require the practice owner to provide a personal guarantee in respect of the company’s liabilities under the lease. This is of no concern as it merely replicates the position that existed before the assignment of the lease to the company.
Self invested personal pension
A SIPP is a tax-efficient vehicle for owning commercial property. It allows for the property to be paid for out of gross income and for the tax to be repaid on the transfer of the property from the practice owner to the SIPP. The changes effectively introduced by the 2009 budget have made gifts such as this very difficult to achieve. This is because for those earning in excess of £150K pa, there is a limit on contributions of £20K pa. Thus, a gift to the fund of £160K, as suggested below, could not be done easily. But it can still be done in other ways, such as through a lower earning spouse’s contributions.
A practice owner who owns a property valued at £200K (with a mortgage of £80K) can transfer the property to the SIPP for £40K, which the SIPP would borrow. In turn, the practice owner would use the £40K to repay one half of his £80K mortgage. The SIPP would then own the property, for which the SIPP provider would be entitled to reclaim £40K of basic rate tax. This could be used to repay the SIPP’s loan. Finally, the practice owner would reclaim £40K of higher rate tax and use it to repay the balance of his £40K mortgage. The upshot would be the property would start off with a mortgage of £80K, which would be written off when the property is transferred into the SIPP.
This example is of course one where there is a loan. The job is simpler if there is no loan. The transfer by the practice owner of a property to a SIPP (or the initial purchase of the property by the SIPP) enables the property to be purchased out of gross, rather than net income. There are other benefits, such as tax relief on rent received and no capital gains on growth after transfer of the property.
That said, there can be Stamp Duty Land Tax implications and CGT on growth from the date of purchase of the property to the date when the property is transferred into the SIPP. The CGT on a property transfer, at the same time as incorporation, is at the entrepreneurs’ relief rate of 10 per cent. If there is no simultaneous business transfer, the CGT on the property transfer is at the standard rate of 18 per cent.
Abrahams Dresden has developed an efficient system for putting in place the transactions described above. We can ensure such transactions are carried through as quickly and as painlessly as possible. Further, our well-practised systems enable us to keep prices down for our clients.
We have excellent connections with SIPP providers, who can ensure the transfer of a property to a SIPP runs smoothly. Our fees are calculated on a time-spent basis, but we supply a fairly accurate estimate prior to commencing work. So what should you do now? It would be a good idea to debate the prospect of incorporation with your accountant, or indeed with us. If the tax position on a full incorporation is marginal, the PCT issue may swing the balance.
Russell Abrahams, Solicitor, Abrahams Dresden LLP
Abrahams Dresden articles and guidance notes are for general information purposes only and generally state the law as at the date of publication. The information may not be relied upon as legal advice. We are of course always happy to advise directly on specific issues arising.