Is your dental practice accumulating capital held
on deposit which is losing value in real terms?
In my experience one of the greatest financial strengths of dental practices is excellent cash flow within
the business.
It is common for this cash flow to quickly build up a capital reserve with no plans to spend the accumulated balance. Despite
the well documented issues concerning poor rates of interest on such savings there is a tendency to leave the money in the hope
that something better will come along. However, if held on deposit this money could be losing value in real terms.
What are my options?
1. More income, more tax
Drawing these funds for personal use could mean increased personal taxation at a time when income tax is at its highest.
This is often another reason why funds are left to accumulate further within the business.
2. Invest the capital in a flexible and tax efficient way
The International Regular Investment Bond could provide the opportunity to defer personal taxation and potentially
generate a higher return over and above what is offered on business deposit accounts. It is an offshore non-qualifying
unit linked whole of life plan.
Benefits
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The bond offers the flexibility to make regular monthly or annual investments for a minimum of five years.
It provides limited companies the opportunity to build capital with the benefit of the investment growth being
freefrom tax within the bond (aside from any withholding tax).
The funds can remain invested after regular investments cease.
The tax will only arise at a point the investor controls.
The Financial Reporting Standard for Small Enterprises (FRSSE) means the assets do not need to be re-valued
each year. Therefore the company is only subject to corporation tax on any growth on full or partial encashment.
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What does this mean to me?
In short, this provides a limited company the opportunity to save a regular sum of money for a minimum period of
5 years where growth will not be subject to corporation tax on an annual basis, only on full or partial encashment.
What can I use this for?
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The future purchase of an interest in a new or existing practice
School or university fees
A child’s marriage or first house
Retirement
Example of how the International Regular Investment
Bond can provide growth whilst deferring tax
ABC Ltd is a medium-sized trading company which has surplus cash of £1m on deposit. It currently earns 3.5% interest on
which it pays Corporation Tax each year at the main rate. Financial Year
1 April 2012 –
31 March 2013
1 April 2013 –
31 March 2014
1 April 2014 –
31 March 2015
1 April 2015 –
31 March 2016
Value of
Investment at
start of year
Interest at
3.5% gross
Corporation
Tax Rate
Tax Due
Net Interest
Accrued
£1m
£35,000
24%
£8,400
£26,600
£1,026,600
£35,931
23%
£8,264
£27,667
£1,054,267
£36,899
22%
£8,118
£28,781
£1,083,048
£37,907
22%
£8,339
£29,568
In practice the tax will be payable quarterly, however, this has been simplified for the purposes of the illustration.
As an alternative, the directors of the company take advice and decide to move the available cash on deposit into an IIB investing
in debt or fixed interest instruments which for the purposes of comparison we shall assume produce the same level of return
after charges i.e. 3.5%. The company uses the historical cost accounting basis of taxation and as a result is able to take advantage
of tax deferral while at the same time allowing the company full access to its money. Accepting that these are investments and
represent a greater level of risk than cash.
Financial Year
1 April 2012 –
31 March 2013
1 April 2013 –
31 March 2014
1 April 2014 –
31 March 2015
1 April 2015 –
31 March 2016
Value of Investment
at start of year
Interest at
3.5% gross
Corporation
Tax Rate
Tax Due
£1m
£35,000
24%
Nil
£1,035,000
£36,225
23%
Nil
£1,071,225
£37,493
22%
Nil
£1,108,718
£38,805
22%
Nil
As the table illustrates, the company will only face a tax charge when it decides to withdraw funds from the bond. At this time it will be taxed on the profits that have arisen but at the prevailing rate of Corporation Tax.
This gives the directors the ability to plan the timing of when tax becomes payable, at what rate and possibly to offset any bond
gains against any trading losses. The following table illustrates the cash flow advantage.
How do I find out more?
To arrange a meeting to discuss your own personal requirements please contact my office:
Darren Wood DipPFS
Director of Navigation Wealth Management
Partner Practice of St. James’s Place Wealth Management
Tel: 01924 229210
Email: [email protected]
Web: www.navigationwm.co.uk/medical
Partners in Managing your Wealth
The Partner Practice represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Services Authority) for the purpose of advising
solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products. The ‘St. James’s Place
Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.