Money Matters

Pros and cons of trading as a limited company

Over the last few months the telephone has not stopped ringing with the same question being posed to me.

“I have heard from one of my colleagues that if I trade as a limited company for my private practice or locum work I will save £000’s in tax” – is this true?

In some cases this statement is true and in others the savings are negligible. One size does not fit all and tax savings will depend on a number of issues such as:

· Level of your private income;

· Could a non working or lower earning spouse be involved in the company?

· Will you be extracting all the company profits?

The good news is if structured correctly substantial savings can be achieved and you could reduce a personal tax and National Insurance rate of 51% to just 10% which is obviously very attractive.

I appreciate that this may seem too good to be true but there will be many of your colleagues already benefiting from this.

So how is this achieved? Your existing private practice has a value and it is this value (including goodwill) that is sold to the new company. As you will have sold your personal trading business, this will crystallise a liability to capital gains tax at a rate of 10% due to the availability of ‘entrepreneurs relief’.

If the value of your personal private practice was say £100,000, then you would have a capital gains tax liability of £10,000. If the sale takes place in July 2011 then this would not actually be payable until 31 January 2013.

Obviously the new company would not have £100,000, so this would be money owed to you and can be repaid by the company tax-free potentially avoiding 51% tax and National Insurance for a number of years.

As an additional bonus the new company may be able to write off the goodwill for tax purposes over a number of years thus reducing the company’s Corporation Tax liability.

The pitfalls are few are far between but care needs to be taken not to overvalue your private practice as this could result in significant personal tax liabilities. Given the potential tax savings highlighted I am sure you can see why HMRC are keen to ensure valuations are accurate.

Jason Sharp is contactable at www.doctorstax.co.uk. This article should be used for general guidance purposes only.

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