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Many of the dentists I meet are members of the NHS Pension scheme, and there are a surprising number who have not completed a death benefit nomination, or a ‘DB2 form’. If you want your spouse or civil partner to receive 100% of your death benefitand you are not concerned about Inheritance Tax (IHT), you do not need to complete the form, as they will receive it automatically.However if you’re not married, you want various people to benefit, or you want to minimise any Inheritance Tax (IHT), you should download a copy of the form to ensure your wishes are likely to be carried out. You can now nominate on organisation or, alternatively, as many people as you like.If you nominate more than one individual you will need to select either ‘equal share’ or enter the percentage of the total benefits each individual should receive.If you make the death benefit nomination in favour of your partner and want them to receive your survivor pension benefits when you die, you must also complete a ‘Partner Nomination Form’ PN1.
Once the benefits have been paid to the survivor they become an asset of the survivors’ estate. When the survivor dies, their estate, which would include any unspent death-in-service benefit monies, is subject to IHT at 40% on the value of the estate in excess of the IHT threshold.
This tax problem can be avoided by nominating the death-in-service benefit or pension death benefit into a trust. The trust is held outside the survivor’s estate and is therefore not subject to IHT on the survivor’s death.
However, the survivor can be a beneficiary of the trust and receive funds. The trust can also be drafted with power to loan monies to the survivor. As a result, the survivor could have the full use of the funds to invest or spend, or live off the income as they see fit.
Because a loan has been made from the trust, a liability has been created which can be paid out of the survivor’s estate on their death. This reduces the value of the estate for IHT purposes.
By using a spousal by-pass trust, the survivor can have the full benefit of the monies payable AND an IHT saving can be made at the same time.
The forms are all available from the NHS Pensions website or you can ask your Pension Officer to download a copy for you.
With an increasing number of dentists likely to be paying personal tax rates of 50%, it’s as important as ever to take whatever legal steps you can to minimise your tax bill.Two useful planning features of investment bonds are the ability to control the point when tax is paid and the possibility of assigning a bond without triggering a tax charge.These can be particularly useful for a higher rate tax payer who takes the investment out for the future benefit of someone with no other income when the bond is cashed in. One obvious area where this can be useful is for university funding.The easiest way to illustrate this is with an example.
Ten years ago Kevin, a higher rate tax payer, invested £200,000 into an offshore investment bond made up of 100 segments to fund the university fees for his grandchildren.
It is now worth £358,169 (assuming 6% growth after charges).
He assigns seven segments to his eldest grand-daughter Rachel to fund her first year of university. The value of the segments is £25,072 and the gain on the segments is £11,071
Rachel cashes in her segments, and she has no other income for the year.
|Personal Allowance||£8,105 @ 0%||£0|
|Starting Rate||£2,710 @ 10%||£271|
|Basic Rate||£256 @ 20%||£51.20|
This is an effective tax rate of just 2.9%!
Kevin can repeat this for each year of Rachel’s studies and keep control of the remaining funds until they are needed for his other grand children.
As investors only need to be non-taxpayers during the year of encashment, dentists who have incorporated and have the ability to control their income can also take advantage.
Those aged over 55 with flexible pension plans may also be able to arrange the encashment of a bond when they have little or no other income.
Dentists have had the option of incorporating their practice since 31 July 2006 and many have taken up this opportunity. The main reasons dentists incorporate is for the tax benefits, although there are other reasons you might want to set up a limited company. These include the protection of limited liability, ability to attract finance and external investors and ease of selling shares in the company to existing staff and outside investors. Any specialist accountant will be able to provide the figures for how much the tax benefits are likely to be, however it’s just as useful to know what the disadvantages are….One of the main disadvantages is that once you’ve done it, it’s very difficult to undo it and go back to being self employed. So you need to make sure that the savings are significant, worth the effort and are likely to continue. It’s important to note there’s no guarantee that the savings you’ll make this year will continue as the Chancellor could and probably will change the rates of Corporation Tax at any time. In fact in the present economic conditions it could be argued that it’s more likely these taxes will increase than in more stable financial times.One particular story I heard recently was of a dentist who’d been advised to incorporate, had started the process of transferring assets into the new company, when the accountant realised the PCT were unhappy with the change and wanted to re-tender their contract. Whether changing to a limited company is actually a material change and a PCT has the right to re-tender is currently being challenged, but I wouldn’t recommend it unless you check with the PCT first.
Even if the PCT does approve the incorporation, they’re likely to insert a control clause in the new contract, which could cause difficulty in selling the goodwill of the practice. As a result of this I know of some dentists that are keen to part incorporate, and continue their NHS contract as self employed. However this again can cause issues as you then need to ensure you split the costs fairly between the Limited Company and your self employed practice.
If you do manage to incorporate an NHS practice, you must ensure that you pay yourself sufficient dividends, PAYE (salary) and / or bonus. Otherwise you might not be eligible for all your NHS superannuation. The reason for this is that your pension limit each year is limited to the higher of £3,600 or your earnings.
Another change is that once you incorporate, the money in the bank account is no longer yours – even if you’re a 100% owner of the company. The cash belongs to ‘Your Dental Practice Limited’ and although you can take this through the payroll as salary or bonus, dividends, directors loan repayments or through a pension contribution, you’ll have lost a great deal of flexibility.
By selling the goodwill of your practice to the limited company you can take a tax free income from the business over the first few years, known as Directors Loan Repayments. However it’s possible this will have an effect on any income protection plans you have. The reason is that protection providers will typically pay out up to 60% of pre-sickness earnings and Directors Loan Repayments don’t always count. It could also have an effect on getting a mortgage as your income could initially be artificially low.
Some final points to watch out for are the costs not just initially but ongoing. By setting up a limited company your reporting requirements will increase and your accountancy bill is likely to go up as well.
If you do want to incorporate make sure you understand the pros and the cons and get professional advice from a specialist dental accountant and solicitor before you make up your mind.
Based on NASDALs latest annual report the average dentist associate’s Net Profits are £72,988 which based on a typical working week works out at £50 per hour.Your time is valuable, so why would you waste it doing something that adds no value and in fact detracts value from your net worth; like managing your own money?Let’s pretend you had an equity portfolio of £100,000 which you manage yourself. Let’s also assume your portfolio outperforms a comparable index by 2% a year, every year.In the first year the market rises 10% and your portfolio rises 12% so you have added an additional £2,000 to your net worth.
Implicit in these assumptions are three crucial factors.
If you only achieve 1% more than the market, the one hour a week drops to a net value of only £20 per hour.
More worrying is the risk incurred. Higher returns, especially from smaller portfolios, are usually generated by taking more risk. In a down year that means your losses are likely to be worse than a tracker fund, and your hourly rate is likely to be negative.
Even with the use of the internet and automatic dealing, an hour a week is not much time to research stocks, place the trades and update your records.
An even bigger assumption is that an hour a week, or even two, is all that is needed to beat the market. Most professional managers work considerably more than the normal working week of 40 hours, and only half of those manage to beat the index in any one year and a lot less over multiple years.
Another issue is that it’s arguably not the best idea to hold all your assets in one asset class, UK equities.
A portfolio of that size should at least have international exposure and some fixed income. As a DIY investor, would you be able to manage those securities as well in your allotted hour or two a week?
On these numbers it looks as if most dentists have probably got better uses of their time than spending it hunched over their PC for a few hours a week!
You’ll no doubt have met plenty of people shaking charity boxes on the high street. But while putting in the odd bit of loose change may be the easiest way to give, it’s also the least tax-efficient.The reason is that such donations can’t be made through the Gift Aid scheme, which uses tax relief to boost the value of your donation. Gift Aid was introduced in 1990 and just last year, UK charities got £828m from the scheme.Under Gift Aid, if a basic rate taxpayer gives £1 then the charity gets £1.25. It doesn’t cost you anything – the charity simply reclaims the basic tax from the taxman. The bonus is 20% of the total amount the charity receives (i.e. £1.25), so they would get back 25p of every £1.There’s a boost for higher rate taxpayers, who can claim extra relief when they fill in their Self Assessment tax return or through their PAYE code if they are employed or have recently incorporated. You can claim the difference between the higher rate of tax 40% and/or 50% and the basic rate of tax 20% on the total ‘gross’ value of your donation to the charity.
For example, if you donate £100, the total value of your donation to the charity is £125 – so you can claim back:
Giving under Gift Aid is often simply a matter of ticking a box declaring you are a UK taxpayer. You need to be liable to pay at least the amount of tax that the charity is reclaiming. There is no minimum and once you’ve made a Gift Aid declaration to a charity, then you don’t need to make it each time you make a new donation.
If your tax situation is changing and you’re likely to earn less money than a previous year, you can ask for Gift Aid donations to be treated as being paid in the previous tax year if you paid enough tax that year to cover both any Gift Aid gifts you made that year and the ones you want to backdate.
Many UK charities including Dentaid and Bridge2Aid use a partner like Justgiving.com to help claim GiftAid and take payment. With services like Justgiving you can set up an account which helps you claim the additional higher rate tax relief by keeping an accurate record of your donations. All you need to do is simply print out a copy of your donations history and attach it to your tax return.
We made the decision to specialise in working with dentists over 10 years ago to the point where almost 100% of new clients we take on now are dentists or the spouses of dentists.
As a result of having a very select group of clients we can afford to invest the time to learn everything there is to know about NHS pensions, and, for example to understand the effects of incorporation for dentists on areas such as their pension and income protection, as well as tax.
However if we were dealing with doctors, vets, pharmacists and every other profession it would be very likely that we could end up being a jack of all trades and master of none.
This specialisation has meant that we have been able to improve the service we offer dentists as our advice is thorough, well-researched and, more often than not, work for one client can end up benefiting another.
Having worked with hundreds of dentists over the years we have a huge number of contacts across the professions from Solicitors, Accountants, Banks, Leasing Companies, Marketing agencies and Valuers.
We’re also members of ASPD, Association of Specialist Providers to Dentists, which demonstrates our commitment to working with dentists and provides a forum for the members to share information and constantly improve our understanding of what’s happening in dentistry.
This also means that, where relevant, we can refer to trusted other professionals and help our dental clients in all areas of their practice.
We know which lenders to use for VDPs, associates, associates without three years trading accounts and incorporated dentists.
As financial advisers we see the financial reality of what happens when someone dies without having made the necessary plans. You can however do it all for a relatively small amount of effort and modest cost. This has been brought sharply into focus for me recently as we haveunfortunately just lost a client who died in his 50s with a wife and two young children.So very briefly these are some of the areas you should review to make sure your plan is likely to work.
The first step is to write a will. Remember for married couples, assets do not automatically pass to their spouse if there’s no Will.
If you are married and have children and your estate (excluding any joint assets) is worth more than £325,000, your spouse will only get the first £325,000 and a life interest (ie the right to take interest on the remainder, but not the capital itself) in half the remainder – the children get the rest.
If there are no children, the spouse would receive the first £450,000 and half the remainder.
Most dental practices are typically owned in just one of the spouse’s names and with no Will there’s no guarantee the spouse would receive the sale proceeds of the practice.
I’m also feeling slightly irritated as I write this as I know someone who’s expecting her first child next year and her husband has been quibbling over a £30 monthly premium to provide over half a million pounds of life cover so that in the event of his death she won’t have to leave the baby in childcare and turn up to the surgery every day.
Life cover has to be the cheapest way to provide financial stability for your dependants.
If you do have any life policies make sure these are placed in trust, which either your solicitor or financial adviser can do for you. This makes sure that in the event of a claim the lump sum falls outside of the estate and is paid directly to the spouse. This not only helps speed up the payment process but can avoid the problems if there isn’t a Will (see above) as well as reducing potential tax bills.
If you work in hospital or as a NHS dentist in practice in the event of death your estate will receive a lump sum of two times your superannuable pay. If you’re legally married you don’t need to complete any further forms as your wife and any dependents will receive both this lump sum and any pension.
However if you’re not married or want various people to benefit you should download and complete the DB2 form. You can now nominate as many people as you like or, alternatively one organisation, such as a trust.
If you make the death benefit nomination in favour of your partner and want them to receive your survivor pension benefits when you die, you must also complete a ‘Partner Nomination Form’ PN1.
Many clients we meet are members of Dentists’ Provident and you can complete a nomination form for the first £5,000. Although this doesn’t actually fall outside the estate it can be very useful to provide a lump sum of cash without having to wait for any legal matters such as probate to be finalised.
Tax Freedom Day shows just how long we spend working for the Treasury, rather than ourselves. Overall, the government takes more than 40% of national income. This means that the average UK resident has to work a full five months of the year solely to pay that tax bill. Last year, that meant working from 1 January to 4 June – just to pay taxes!And that’s the average UK resident. If you are a higher rate tax payer, there’s a fairly high chance you currently spend more time working for the Treasury than yourself.The 2011 Budget did little to change that. Assuming the Chancellor got his growth forecasts right, Tax Freedom Day 2011 will fall on June 2. And if you take government borrowing into account, Tax Freedom Day does not come until 14 June.For much of the last few years, however, Tax Freedom Day has been coming later and later. In fact, it falls a full week later now than it did back in 2002. That is an extra week of working for the Chancellor.
Tax Freedom Day is calculated by taking the UK’s net national income and calculating how much of that is taken away in taxes. These taxes include not just income tax, but VAT, inheritance tax, stamp duty, car and fuel taxes, excise taxes on alcohol and cigarettes, taxes on companies and employment, and many more.
Another worrying issue is that as there is a general move towards tax harmonisation in the single currency area and with taxes among the fifteen euro members generally considerably higher than in Britain, such moves must mean a substantial increase in the British tax burden over and above what is already being planned.
So if you’d rather be working for yourself than the Treasury make the most of all the tax breaks available: Individual Savings Accounts, Pensions, Estate planning, Life Insurance policies in trust, Wills, equalisation of assets, childcare vouchers, income drawdown, annual Capital Gains Tax exemption, offshore investment planning, Venture Capital Trusts, Enterprise Investment Schemes, offset mortgages to name just a few.
If that all seems too much work, find a specialist accountant and IFA and they can help you reduce your tax bill which means you can spend more time working for yourself and less time working for the Government.
Most dentists know that for dental practices there are generous Inheritance Tax (IHT) reliefs which can work to make practice assets exempt or partially exempt from IHT. This relief is called Business Property Relief (BPR).There are three key factors that determine whether your practice will attract Business Property Relief.
Many businesses have been set up so that on death the business is forced to be sold to a partner or spouse, but in this situation you would lose the BPR. So to avoid losing this crucial benefit you can simply use a double option agreement. This works by allowing the deceased’s surviving spouse the option to sell the business back to the surviving partners and also the partners the option to purchase. If either of the two parties takes up the offer the survivor must oblige.
The ownership test broadly means that the business should be owned for the previous two years.
To receive 100% Business Property Relief you need to own a practice or a share of a practice. Other qualifying assets are unquoted securities in a business that gives the transferor control (owning over 50% of the shares) of the practice and unquoted shares in a trading company.
One approach taken to avoid IHT is to buy shares or securities in Alternative Investment Market (AIM) listed stock. After 2 years the assets benefit from 100% BPR.
You can also use BPR to your advantage by setting up a family trust. This can be useful if you’re planning to sell your practice, you want to reduce your IHT liability and you don’t necessarily need all your assets to provide an income. All you need to do before you agree to sell your practice is to set up a family trust and gift your practice property into it.
The assets then immediately qualify under BPR and remain outside your estate for IHT purposes. The only downside to point out is that the assets are now irrevocably outside your estate and the only people that can benefit will be the beneficiaries – typically your children or grandchildren.
Most dentists have no idea how long they are going to live for, in fact most tend to underestimate.It doesn’t take a genius to figure out that knowing when you’re going to die is a fairly crucial ingredient to helping manage your money, especially as most people prefer not to run out of it. Clearly without the benefit of hindsight, this can be tricky but if you’re going to plan ahead you need to start making some assumptions.The latest figures from the Office for National Statistics indicate that life expectancy at birth for males in England is 77.7 and 81.9 for females. If you happen to live in the South you’re likely to live even longer. Life expectancy if you’re already 65 is 82 and 85 respectively. These figures are averages so for a young associate there’s a good chance you’ll live longer than 90.For those with NHS pensions, increases in life expectancy are not necessarily going to affect you financially as this risk is borne by NHS Pensions and ultimately the state. Once you’ve retired at either 60 or 65, depending on whether you joined the NHSPS before or after 1 April 2008, the pension is index-linked every year until death. The main risk with regards to longevity for these fortunate pensioners is if they predecease their spouse and the widow(er)’s NHS pension then halves.
For those that are relying on personal pensions, the risk of longevity falls on the individual dentist. Not only are you at risk of equity markets during your working life, you are then subject to gilt yields which affect the amount of annuity (annual income in exchange for a capital sum) you can buy with your pension. At retirement you can choose to buy a level annuity or for a smaller initial pension you can opt for it to increase with inflation every year.
Gilt yields have fallen significantly in the last few years so you now need a much greater lump sum to buy the same level of income as you might have done in the past.
So if you’re planning to retire at 60, you may need to consider creating enough cash to provide for a further 30 years which is almost as long as most dentists entire working life. Many dentists are reducing their NHS commitments and increasing their private work and hoping to retire even younger than 60. They might find that the combined effect of increased life expectancy, and falling gilt yields means they have to work longer, reduce their expectations at retirement or just accept they’re going to run out of money.
For a bit of light entertainment I’ve just typed “death clock” into my favourite internet search engine, completed a couple of questions and discovered that my Personal Day of Death is Sunday June 12th 2061 – which takes me to over 90!
Please note that although the advisers have been working with dentists for many years, MocoMoney Limited was only recently established and as we have not yet received our Consumer Credit License any advise regarding mortgages, credit facilities or debt management / counselling would have to be done through Essential Money.
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