Article relevant to the tax year 2018/19.
Are you thinking of selling a GP practice or medical business?
If you are a doctor thinking of selling a GP practice, it is important for you to understand entrepreneurs’ relief when selling up.
It could be time to hand over the reins to someone new or maybe you are looking for a career change. Whatever the reason for selling a GP practice you will need to consider the amount of Capital Gains Tax (CGT) that will result in the sale.
The usual CGT bands for selling a business is 10% for basic rate taxpayers. This rate increases for high rate taxpayers to 20%. These bands are only applicable for people that own a limited company or have a trade activity in their personal name.
An example of selling a GP practice
We will look at an example of where Jim and his wife Joan are both doctors from their GP practice. They are thinking of selling their GP business and estimate that they will make a profit on the £500,000 sale. They will be charged 20% CGT, assuming they are both high rate taxpayers.
We will ignore the annual CGT allowances for the purpose of this article. The tax charge for selling a GP business or selling a property development company will be £100,000. This is based on the 20% CGT rate as described above.
Their GP practice is comprised of:
£100,000 Plant and machinery (medical equipment)
£20,000 Stock (medical supplies, drugs)
£30,000 Cash in the bank
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To make £500,000 they are adding in the value of goodwill of building up the GP practice over the many years. They have also got private GP work that is guaranteed and not factored into the above. The GP practice makes £300,000 per year.
What is Entrepreneurs’ Relief?
Entrepreneurs’ Relief (ER) is a preferential Capital Gains Tax rate of 10%. To qualify for entrepreneurs’ relief you must satisfy the below criteria:
• The person claiming ER has at least 5% of voting shares in the business which is being part or fully closed down.
• The person claiming ER has owned the shares in the business for at least 12 months. From April 2019 this will increase to 24 months.
• The business on which ER is being claimed is a Trading business (ie not property rental business, bank interest or stocks and shares trading income) or it is the holding company of a trading group within the last 12 months. Again from April 2019, this period will increase from 12 to 24 months.
• The person claiming ER works in the business (ie is not a “sleeping partner”).
Changes to Entrepreneurs since the Autumn 2018 budget announcement
Since the autumn 2018 budget announcement two additional tests have been introduced, with immediate effect: In addition to giving the holder at least 5% of the votes, the ordinary shareholding must also give at least:
– 5% of the company’s distributable profits available to ordinary shareholders; and
– 5% of assets in a winding up.
Please remember that the shareholder must also have worked in the business as a director or an employee.
This applies especially to structures involving growth shares or preferred ordinary shares. This also applies where a share class has preferential dividend or winding up rights.
As previously announced, the Government will legislate to allow individuals whose shareholding is diluted below the 5% qualifying threshold for entrepreneurs’ relief as a result of a new share issue to obtain relief for gains up to that time, subject to conditions. The change will apply where a company ceases to be the individual’s personal company as a result of its issuing shares on or after 6th April 2019.
Selling a GP practice & entrepreneurs’’ relief
As you can see with the above example for Joan and Jim that their tax liability at 20% would be £100,000. They satisfy the criteria above
– Doctors must have owned GP business for many years
– They own 100% of the business between them
– The GP practice is a trade activity
– Doctors must have worked within the GP practice (even as an advisor)
As such they will satisfy the criteria for entrepreneurs relief. As such their CGT liability will fall from 20% to 10%. This is a great tax saving of £50,000. As you can appreciate that Joan and Jim will be delighted with this tax saving
Ways of reducing CGT
We have written another article on how doctors may reduce their CGT when selling a GP practice. This may be read here
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