There are a multitude of reasons why a doctor would decide to incorporate their private medical practice. One notable upside is the opportunity to sell the free goodwill from the sole trader practice to the newly formed limited company to create a director’s loan account. The director’s loan account enables the doctor to draw down on the loan with no additional taxes payable. In addition to the tax free drawings, some doctors can claim a deduction against corporate profits by systematically writing off the goodwill asset. Whilst this is a particularly technical area, the fact of the matter is that there are some serious tax breaks associated.
Upon sale of the goodwill to the company, the doctor would pay a reduced rate of capital gains tax (10%) by making a claim for Entrepreneurial Relief. However, within the Autumn Statement 2014, Chancellor George Osborne confirmed that transfers of goodwill at incorporation would be taxed at 28% rather than the reduced rate of 10%. This is a significant blow for doctors looking to incorporate their practice especially as the goodwill (patient lists, contracts, established income stream) is often the most valuable asset present within the practice.
The misery was compounded when the Chancellor explained that the corporation tax relief associated with the writing down of the goodwill asset would also be removed.
Whilst this policy change will affect many business types, there is no doubt that doctors will feel the pain.