Dentists Who Invest

Episode 277

Is A Holding Company
Right For Me?

Is A Holding Company Right For Me?

Hosted By: Dr. James Martin

Dr. James: 

Welcome back to the Dentists Who Invest Podcast with returning face accountant, mr David Hossein. We’re here today to talk about holding companies and clear up a little bit of the confusion that’s out there whenever it comes to this topic, and especially where they can be a good idea for Dentist, but also very much not a good idea, right, David? But that’s coming up in just a second, but before we do, David, how are you today?

David: 

Very good. Thank you, James. How are you doing?

Dr. James: 

I’m flipping amazing, David. There’ll be some people out there on the Dentists Who Invest podcast potentially who have yet to come across you. If we were able to have a little bit of a high level bio, that would be a lovely way to get the ball rolling today.

David: 

Yep, sure.

David: 

So we’re a small firm of dental accountants.

David: 

We act solely for dentists, but dentists who are entrepreneurial, so either single site owner, multi-site owner, opening a squad, or have a side activity either investing or other businesses.

David: 

So we work for dentists throughout their life cycle, from being an associate to being, you know, first time buyer, multi-site owner, getting ready for sale, and throughout all of that there are lots of different key events and we’ve got experience with all of those and we kind of look at things holistically. So when we talk to our clients, it’s understanding where they are on that journey and getting getting them ready to be structured correctly for tax and holding companies is something that came up about two weeks ago on the Facebook group and I saw a lot of people asking questions about should I have a holding company, and then the comments were quite contradictory on where people thought it was good, and then I read those and made my comments and then it stirred up a bit of a thing. So I thought it might be a good idea to to just do a proper webinar where we say this is when it’s a good idea, and it can be a great idea, but it can also be a terrible idea, um, depending on what your plans are in the future.

Dr. James: 

So I just thought, if we talk it through, got some slides and we can hopefully explain it to people absolutely and do our best to set the record straight, of course, or certainly give some people some things to think about. We don’t operate out of that energy where we’re like, yeah, we’re right and everybody else is wrong. But it is helpful to know this stuff right and then, when you have these considerations, you can make better decisions. And I’ll tell you something I’ve learned about the world of tax over the years it really is worth just taking that extra little bit of time and planning something based on your future plans, because if you make a decision in flipping 2024, it can come back to haunt you and like flip in 2050, okay, it’s like well, from the exit, from your business and all this crazy stuff, man, so you really gotta think ahead.

Dr. James: 

Anyway, on that note, we are obviously putting that, this content out today as a podcast, but also potentially as a video as well, which should be on the dentistswhoinvest. com website. Guys, dentistswhoinvest. com forward slash videos if you want to see the visual format of this content that we’re making today. And, on that note, David has actually prepared a presentation. Now what we are going to do is narrate over the presentation, and the reason we’re going to do that is so that anybody who’s listening to the Purity Audio format doesn’t miss out on as much. But, as I say, it’s going to be on the website, guys, if you want to catch up on it there. Anyway, David, I suppose we should probably start off by jumping into that presentation and maybe with a little bit of a definition about holding companies. I haven’t seen the slides, but I bet that’s going to be the first slide.

David: 

Yes, we get straight into it. It’s quite a concise thing to talk about, but we’ll get stuck in.

Dr. James: 

Lovely job Lee.

David: 

All right, so let me see if I can share. Start like this Okay, is that visible?

Dr. James: 

Yeah, got it on my side.

David: 

All right, perfect. So holding companies when to use. So when you have multiple companies, you’ve got different options of different structures how to own them. A very common scenario is what you see on screen here, so a dental associate or a dental practice in one company and a property company on the other side. Those two companies are owned and controlled by the dentist. They do not have a company that owns the shares of the dental company and the property company. There’s not this extra layer. And this tends to happen where you have a dentist who is generating cash in their company and they spot an opportunity to buy a property and either the lender or their advisors say, well, it’s better to have it in a separate company. So now we have two companies. The dental company can lend money to the property company and that’s okay as long as both companies are under common control. There are no tax charges or implications in doing that, and that’s kind of the first simple setup. So the dentist owns two companies. One is a dental company, one is a dental company, one is a property company and the dental company lends money across. So so far, so good.

David: 

The next structure is like this, and it’s it looks very similar. So you’ve still got a dental company and a property company, but you’ve got an additional layer above that, which is a holding company, and the holding company is the entity that owns the shares in the dental company and the property company, and then, obviously, the dentist owns the shares of the holding company. So that’s. You can hopefully see that up top there. Does that make sense, james? Yeah, totally with you. So, as I say, it can be a good idea, but it can also be a bad idea, and I’ll start with why it can be a bad idea. In fact, before I say why it can be a good idea but it can also be a bad idea, I’ll start with why it can be a bad idea Before I say why it can be a bad idea.

David: 

The first question I will ask, and what I noticed from the comments in the Facebook group, is some people were under the impression that you have to have this to lend money between two companies. That’s not true from a tax perspective. And that’s not true from a tax perspective, as I said, if both companies going back to the first slide are commonly owned and controlled, it’s absolutely fine to lend money between the two companies. It’s not an issue. You don’t need to have this to lend money. I was seeing people saying, well, I’ve been told to put this in place, but they couldn’t tell me why. And that was what was worrying me, that they couldn’t tell me why I’ve got this holding company. And when we opened it up because I did speak to a few people, it actually transpired it was, um, not the right for them, right thing for them. And we’re in the process of unpicking that um, and if I know, I know, and if it’s spotted um at the right time, you can unpick it. So that’s that’s what we’re doing. But that’s why it was important to do this. So we really flagged the people Just understand if you do have a holding company, why have you got it and when can it be a problem?

David: 

So we’ll get into that. So it gets a problem when the dental company is no longer associated with the company. So if I explain that a bit differently so, james, you’re a dentist, you set up a limited company, you trade as an associate for five, 10 years and you’ve got a lot of cash there. You’ve used some of that cash to open a property company. You’ve got some more cash left over and you decide to either open a squat practice or buy a dental practice. So the dental company is no longer a dental associate company, it’s converted to a dental practice and that dental practice is now connected to a property company via a holding company.

David: 

So what that means is, if you sell the dental company in the future, the money that is generated from the sale of the dental company will be received by the holding company. So you sell your dental practice and the slide here explains it in numbers for a million pound. The million pound goes into your holding company and it goes in there and that’s fine. Now it can qualify for what’s called substantial shareholding exemption. So that means you don’t actually pay tax on the million pound when it comes into the company. But that million pound is now trapped inside the dental company and you know if you’ve got plans to use that money personally. Let’s say you wanted to pay off your mortgage or do some private investments outside of the company. You then have to take the money out as a dividend and that will cost you 376 000 pound if you take it out in one whack and just to be super clear, that’s in the situation where there’s not a holding company right no, this, this is where you, where you have the holding company and so it’s on screen there.

David: 

So, if you can see that, see the holding company. It owns the dental company and it owns the property company. The holding company sells the dental company but the money is received by the holding company because it obviously owns a dental practice. Yes, but it can’t get it out to you any other way than as a dividend because that holding company has a property company beneath it. Um, so you can’t. So another thing that people you know sometimes do is liquidate a holding company to get it out and pay 10, but you can’t liquidate a holding company that’s got a property company underneath it. You have to first go into demergers and that’s very costly and that’s time and so on.

Dr. James: 

I can see where all these considerations are going to get sticky, really right here. Yeah, particularly, I guess where you’re going with this is. I know it used to be called entrepreneur’s relief.

David: 

No, it’s not called that anymore, but yes, and that’s that’s what you miss out on. So I wanted to do this one first, to see what the tax charge is, if you’ve kind of have to pay it as a dividend because you don’t get the option to get the entrepreneurs relief, whereas if you owned it personally, so you don’t have the holding company, you can sell the dental practice personally and as a person you will get entrepreneur’s relief if you meet the conditions having it for, you know, two years and so on and you can get the capital gains tax rate of 10 percent and in that situation you’re only paying a hundred thousand. So you know, in in the other situation it’s a big difference between 376 I think it was um to 100, so that that gets a bit worrying for me where people have got holding companies and they’re not, they’re not aware, and I think we had one chat we spoke to was actually planning to open a dental practice and he had this structure here. So if you, if you do have this at the moment and you open a dental, a dental company in future, just have a chat with your accountant and let them know that that’s your plans, cause you don’t, you don’t want to have this future, as you say 10 years down the line where you’ve got a big tax charge Cause it can be avoided, you want to go for this situation here. If you are going to use that money from the sale of the practice personally to pay off your mortgage, use it in other ways, for yourself personally, then go for the entrepreneur’s relief and own it personally. So that’s the main problem I’ve got with holding companies.

David: 

Now the other side to that is it can be so to flip it on its head. That’s when it’s a bad idea. The question is so when is it a good idea? So if you would say to me look, David, I’ve got this dental practice, it’s in a company and I’m going to sell it, and when I sell it I’m going to buy another dental practice. And what’s the best structure to have in that situation?

David: 

Well, in that situation, yeah, have a holding company. Because if you’ve got the holding company, in that situation, holding companies don’t pay capital gains tax. So if we flip it back to here, so there’s another slide. So if you have a situation where again, you’ve got the holding company, because you, you know you’re going to reinvest the funds, you can get the million pound into the holding company when the million comes in. There’s no capital gains tax. And let’s say you know you’re going to buy another dental practice where you can simply reinvest that money through the holding company to buy the second practice, and in that situation you’re not paying the 10% tax, you’re paying tax at zero. So it can be a good idea if you’re going to reinvest the money. If you’re not, then think about owning it personally could ask a question on that.

Dr. James: 

So if you’re going to reinvest it and obviously, um, you know that would be well you don’t have to pay your corp tax on it, right, if you’re going to reinvest it? Have I understood that correctly?

David: 

yeah, if you, if you reinvest as long as um the holding companies own the dental practice for more than 12 months and it’s owned more than 10 of it, and the majority of cases that will be the case. Then when the holding company sells dental practice, it doesn’t pay any corporation tax interesting, okay, cool, and that has to be.

Dr. James: 

It has to be. It has to have owned it for over 12 months, but what sort of time frame do you have to purchase that next practice on there’s no time for you don’t have to yeah, you get the substantial shareholding exemption.

David: 

The conditions are not connected to a future investment, so that million pound could sit in that company for five years while you think about your options. But it’s better not to be like that. So it’s better that you know you’re going to reinvest it. So you have to be clear on that. If you’re not sure, then maybe don’t have the holding company. But if you know that you are going to do another dental practice but you might need time to find it, then you can have the holding company and the holding company can be introduced in future. So one of the challenges with holding companies is, once it’s in place, it’s hard to take it out. But if you know you’re going to need it, as long as you do it 12 months before the sale, it can be put in very easily. But once it’s in it’s hard to take out. So that’s why it’s it’s sometimes better to leave it if you’re not sure, because most people won’t be sure what their plans are once they’ve sold a practice, especially if you’re just buying it now.

Dr. James: 

So makes sense. And I have another question, but I really hope I’m not jumping the gun with this one, so feel free to tell me if I am. But I’m going to ask it now, while it’s in my head, in case you don’t get the opportunity later. So let’s say and I don’t know how elaborate you can get with this stuff and how it works really but let’s say you had your dental practice company 50 owned by your holding company and 50 owned by you. Could you you get the entrepreneur’s relief on your side and then have the rest to keep as profits in the holding company for a future dental practice? So you can kind of hedge your bets.

David: 

Yes, it’s, it’s. It’s a great question, by the way. And is it possible? Yes, it’s possible, it’s possible. Oh goodness me. Yeah, the reason it’s possible is you’ve said 50. If you’d said 10, it becomes difficult. But where we’re over 25, um, it obviously needs looking at an attack, snow and some advice, um, but is it possible? Yes, it’s possible. And if you’ve got, as you said, that kind of mindset where I’m going to enjoy some of it, but some of it’s for business, um, that could be a good option as well. So it’s a really good question holy moly, that’s flipping awesome.

Dr. James: 

And by the way, just so I can bring myself up to speed here, it’s not called entrepreneurs relief anymore, right? What’s it called now?

David: 

yeah, it’s been changed to badr business asset disposal relief, so it’s a bad relief now.

Dr. James: 

Yeah, yeah, no, I remember somebody told me that it had changed. And because here’s the thing, right, the one thing about entrepreneurs oh, I did it again the one thing about bad is that nobody knows whether or not it’s actually going to be around and how long it might be around for, because once upon a time it was 10 million, now it’s 1 million and no one knows how that’s going to shift. Uh, so there is, you know, there’s, there’s an argument there that you might want to cash out some that level of money into your personal name, because, remember, that’s in your personal name, that’s 900k in your personal name. That’s really flipping hard to get otherwise without getting whacked by tax. Uh, so there’s an argument to be had there that someone might want to capitalize on that sooner rather than later, particularly with the sale of one of their earlier dental practices. But, like I say, just some food for thought.

David: 

That’s a really good point. This assumes we have BADR. Most of the parties have said they do want to look at capital gains tax, so it is possible it will change, but it’s possible and it’s not been clearly defined how it could change. So for the moment, everything we’ve said is only based on the rules as they are today. So obviously, disclaimer this could change if we get changes in tax rates.

Dr. James: 

Seems reasonable. Anyway, I just wanted to jump in with those two things. I know you were in full flow there.

David: 

No, no, that’s it and that’s really the end of the slide on it. It’s quite a simple but complicated subject and I hope it made sense for people who were listening. And any queries, obviously you can reach out later.

Dr. James: 

Cheers. Well, it certainly made sense to me, so thanks for that, David. But, David, wasn’t there some more? Maybe I’m wrong, but you know, in that previous slide you had just then was there some more advantages.

David: 

No, there was an extra, sorry. There was one more point about inheritance tax, and this is the other thing that people hadn’t been made aware of. So if you go to a situation where your company’s owned like this, so with the holding company, so the way inheritance tax works is if you have a dental practice and God forbid you cross the road, you’re hit by a bus that can be passed down to your kids tax-free because it’s a business asset. So business assets don’t have inheritance tax. Investments do have inheritance tax. Investments do have inheritance tax. So, leaving pensions aside, but if you have a property company and you you know, god forbid you hit by a bus, it passes down to your kids, inheritance tax will apply to the property company.

David: 

Where you put a dental practice and a property company together, you could potentially you’d be passing down the holding company shares and if the group is looked at together and the taxman say, well, hang on a second, you’ve got way more properties here than you do uh, dental practices that can now be deemed to be an investment group and you would lose, um, business property relief on the dental practice. So it’s important to know that there’s an extra step to think about. That, going back to the idea is it a good idea? Am I reinvesting? You have to think about you know nobody likes to talk about inheritance tax, but it’s inevitable. So you have to be mindful that if you change the group to being a trading company, to an investment group, you could lose inheritance tax, business property relief. So you know, don’t cross any roads quickly. If you do that, this is potentially the advice there gotcha.

Dr. James: 

Thanks for that. And just one more question. This might be a silly question. You might have covered this. I get why it’s a good idea to have the holding company above the dental practice company. Okay, why does the holding company have to own shares in the property company? Because can the holding company not just lend money to the property company without necessarily being a shareholder in that company?

David: 

Yes, yes, it can. So that’s why and I said at the beginning the question if an advisor says to you, well, look, have you thought about a holding company? The question I always say to ask is why have you been advised to have a holding company? What’s the benefit? What’s the reason it’s necessary? It isn’t necessary to have a holding company over a property company in order for money to be lent. That’s from a tax perspective. I have had the client say that the bank preferred that, whereas I would say well, if the bank is pushing for that, push back and potentially consider a different lender, because the banks will not consider or give you tax advice. That’s not what they’re looking out for. So, other than potential pressure from the lender, which I would push back on, there is no reason oh, I see, because I was just going off this little image here uh, are you?

Dr. James: 

I thought that can you see, right there. I thought that, uh, there was an advantage to doing that. But then I kind of played it through in my head and I was like, oh okay, so really what we’re saying is you could have the holding company over the dental practice company and then that’s it, do what you like with the money when it comes to lending, you could cut that line and not have the property company there, exactly.

Dr. James: 

Sweet, okay, cool. Well, listen, David, that was flipping awesome, I must say, actually, because that was a really nice concise summary of the pros and cons, shall we say, of Holden Coase. Thank you so much for your time today. Anything you’d like to say to wrap up on that one?

David: 

Well, thanks for listening and, as I say, if you’ve got any questions, feel free to reach out. Thanks, jack.

Dr. James: 

David an absolute pleasure, Looking forward to our next episode on the denison invest podcast already. I always learn loads and I’m sure it’s big for the listeners as well. Thank you so much for your time and we’ll speak again soon thanks, james, take care.

Dr. James: 

Welcome back to the Dentists Who Invest Podcast with returning face accountant, mr David Hossein. We’re here today to talk about holding companies and clear up a little bit of the confusion that’s out there whenever it comes to this topic, and especially where they can be a good idea for Dentist, but also very much not a good idea, right, David? But that’s coming up in just a second, but before we do, David, how are you today?

David: 

Very good. Thank you, James. How are you doing?

Dr. James: 

I’m flipping amazing, David. There’ll be some people out there on the Dentists Who Invest podcast potentially who have yet to come across you. If we were able to have a little bit of a high level bio, that would be a lovely way to get the ball rolling today.

David: 

Yep, sure.

David: 

So we’re a small firm of dental accountants.

David: 

We act solely for dentists, but dentists who are entrepreneurial, so either single site owner, multi-site owner, opening a squad, or have a side activity either investing or other businesses.

David: 

So we work for dentists throughout their life cycle, from being an associate to being, you know, first time buyer, multi-site owner, getting ready for sale, and throughout all of that there are lots of different key events and we’ve got experience with all of those and we kind of look at things holistically. So when we talk to our clients, it’s understanding where they are on that journey and getting getting them ready to be structured correctly for tax and holding companies is something that came up about two weeks ago on the Facebook group and I saw a lot of people asking questions about should I have a holding company, and then the comments were quite contradictory on where people thought it was good, and then I read those and made my comments and then it stirred up a bit of a thing. So I thought it might be a good idea to to just do a proper webinar where we say this is when it’s a good idea, and it can be a great idea, but it can also be a terrible idea, um, depending on what your plans are in the future.

Dr. James: 

So I just thought, if we talk it through, got some slides and we can hopefully explain it to people absolutely and do our best to set the record straight, of course, or certainly give some people some things to think about. We don’t operate out of that energy where we’re like, yeah, we’re right and everybody else is wrong. But it is helpful to know this stuff right and then, when you have these considerations, you can make better decisions. And I’ll tell you something I’ve learned about the world of tax over the years it really is worth just taking that extra little bit of time and planning something based on your future plans, because if you make a decision in flipping 2024, it can come back to haunt you and like flip in 2050, okay, it’s like well, from the exit, from your business and all this crazy stuff, man, so you really gotta think ahead.

Dr. James: 

Anyway, on that note, we are obviously putting that, this content out today as a podcast, but also potentially as a video as well, which should be on the dentistswhoinvest. com website. Guys, dentistswhoinvest. com forward slash videos if you want to see the visual format of this content that we’re making today. And, on that note, David has actually prepared a presentation. Now what we are going to do is narrate over the presentation, and the reason we’re going to do that is so that anybody who’s listening to the Purity Audio format doesn’t miss out on as much. But, as I say, it’s going to be on the website, guys, if you want to catch up on it there. Anyway, David, I suppose we should probably start off by jumping into that presentation and maybe with a little bit of a definition about holding companies. I haven’t seen the slides, but I bet that’s going to be the first slide.

David: 

Yes, we get straight into it. It’s quite a concise thing to talk about, but we’ll get stuck in.

Dr. James: 

Lovely job Lee.

David: 

All right, so let me see if I can share. Start like this Okay, is that visible?

Dr. James: 

Yeah, got it on my side.

David: 

All right, perfect. So holding companies when to use. So when you have multiple companies, you’ve got different options of different structures how to own them. A very common scenario is what you see on screen here, so a dental associate or a dental practice in one company and a property company on the other side. Those two companies are owned and controlled by the dentist. They do not have a company that owns the shares of the dental company and the property company. There’s not this extra layer. And this tends to happen where you have a dentist who is generating cash in their company and they spot an opportunity to buy a property and either the lender or their advisors say, well, it’s better to have it in a separate company. So now we have two companies. The dental company can lend money to the property company and that’s okay as long as both companies are under common control. There are no tax charges or implications in doing that, and that’s kind of the first simple setup. So the dentist owns two companies. One is a dental company, one is a dental company, one is a property company and the dental company lends money across. So so far, so good.

David: 

The next structure is like this, and it’s it looks very similar. So you’ve still got a dental company and a property company, but you’ve got an additional layer above that, which is a holding company, and the holding company is the entity that owns the shares in the dental company and the property company, and then, obviously, the dentist owns the shares of the holding company. So that’s. You can hopefully see that up top there. Does that make sense, james? Yeah, totally with you. So, as I say, it can be a good idea, but it can also be a bad idea, and I’ll start with why it can be a bad idea. In fact, before I say why it can be a good idea but it can also be a bad idea, I’ll start with why it can be a bad idea Before I say why it can be a bad idea.

David: 

The first question I will ask, and what I noticed from the comments in the Facebook group, is some people were under the impression that you have to have this to lend money between two companies. That’s not true from a tax perspective. And that’s not true from a tax perspective, as I said, if both companies going back to the first slide are commonly owned and controlled, it’s absolutely fine to lend money between the two companies. It’s not an issue. You don’t need to have this to lend money. I was seeing people saying, well, I’ve been told to put this in place, but they couldn’t tell me why. And that was what was worrying me, that they couldn’t tell me why I’ve got this holding company. And when we opened it up because I did speak to a few people, it actually transpired it was, um, not the right for them, right thing for them. And we’re in the process of unpicking that um, and if I know, I know, and if it’s spotted um at the right time, you can unpick it. So that’s that’s what we’re doing. But that’s why it was important to do this. So we really flagged the people Just understand if you do have a holding company, why have you got it and when can it be a problem?

David: 

So we’ll get into that. So it gets a problem when the dental company is no longer associated with the company. So if I explain that a bit differently so, james, you’re a dentist, you set up a limited company, you trade as an associate for five, 10 years and you’ve got a lot of cash there. You’ve used some of that cash to open a property company. You’ve got some more cash left over and you decide to either open a squat practice or buy a dental practice. So the dental company is no longer a dental associate company, it’s converted to a dental practice and that dental practice is now connected to a property company via a holding company.

David: 

So what that means is, if you sell the dental company in the future, the money that is generated from the sale of the dental company will be received by the holding company. So you sell your dental practice and the slide here explains it in numbers for a million pound. The million pound goes into your holding company and it goes in there and that’s fine. Now it can qualify for what’s called substantial shareholding exemption. So that means you don’t actually pay tax on the million pound when it comes into the company. But that million pound is now trapped inside the dental company and you know if you’ve got plans to use that money personally. Let’s say you wanted to pay off your mortgage or do some private investments outside of the company. You then have to take the money out as a dividend and that will cost you 376 000 pound if you take it out in one whack and just to be super clear, that’s in the situation where there’s not a holding company right no, this, this is where you, where you have the holding company and so it’s on screen there.

David: 

So, if you can see that, see the holding company. It owns the dental company and it owns the property company. The holding company sells the dental company but the money is received by the holding company because it obviously owns a dental practice. Yes, but it can’t get it out to you any other way than as a dividend because that holding company has a property company beneath it. Um, so you can’t. So another thing that people you know sometimes do is liquidate a holding company to get it out and pay 10, but you can’t liquidate a holding company that’s got a property company underneath it. You have to first go into demergers and that’s very costly and that’s time and so on.

Dr. James: 

I can see where all these considerations are going to get sticky, really right here. Yeah, particularly, I guess where you’re going with this is. I know it used to be called entrepreneur’s relief.

David: 

No, it’s not called that anymore, but yes, and that’s that’s what you miss out on. So I wanted to do this one first, to see what the tax charge is, if you’ve kind of have to pay it as a dividend because you don’t get the option to get the entrepreneurs relief, whereas if you owned it personally, so you don’t have the holding company, you can sell the dental practice personally and as a person you will get entrepreneur’s relief if you meet the conditions having it for, you know, two years and so on and you can get the capital gains tax rate of 10 percent and in that situation you’re only paying a hundred thousand. So you know, in in the other situation it’s a big difference between 376 I think it was um to 100, so that that gets a bit worrying for me where people have got holding companies and they’re not, they’re not aware, and I think we had one chat we spoke to was actually planning to open a dental practice and he had this structure here. So if you, if you do have this at the moment and you open a dental, a dental company in future, just have a chat with your accountant and let them know that that’s your plans, cause you don’t, you don’t want to have this future, as you say 10 years down the line where you’ve got a big tax charge Cause it can be avoided, you want to go for this situation here. If you are going to use that money from the sale of the practice personally to pay off your mortgage, use it in other ways, for yourself personally, then go for the entrepreneur’s relief and own it personally. So that’s the main problem I’ve got with holding companies.

David: 

Now the other side to that is it can be so to flip it on its head. That’s when it’s a bad idea. The question is so when is it a good idea? So if you would say to me look, David, I’ve got this dental practice, it’s in a company and I’m going to sell it, and when I sell it I’m going to buy another dental practice. And what’s the best structure to have in that situation?

 

David: 

Well, in that situation, yeah, have a holding company. Because if you’ve got the holding company, in that situation, holding companies don’t pay capital gains tax. So if we flip it back to here, so there’s another slide. So if you have a situation where again, you’ve got the holding company, because you, you know you’re going to reinvest the funds, you can get the million pound into the holding company when the million comes in. There’s no capital gains tax. And let’s say you know you’re going to buy another dental practice where you can simply reinvest that money through the holding company to buy the second practice, and in that situation you’re not paying the 10% tax, you’re paying tax at zero. So it can be a good idea if you’re going to reinvest the money. If you’re not, then think about owning it personally could ask a question on that.

Dr. James: 

So if you’re going to reinvest it and obviously, um, you know that would be well you don’t have to pay your corp tax on it, right, if you’re going to reinvest it? Have I understood that correctly?

David: 

yeah, if you, if you reinvest as long as um the holding companies own the dental practice for more than 12 months and it’s owned more than 10 of it, and the majority of cases that will be the case. Then when the holding company sells dental practice, it doesn’t pay any corporation tax interesting, okay, cool, and that has to be.

Dr. James: 

It has to be. It has to have owned it for over 12 months, but what sort of time frame do you have to purchase that next practice on there’s no time for you don’t have to yeah, you get the substantial shareholding exemption.

David: 

The conditions are not connected to a future investment, so that million pound could sit in that company for five years while you think about your options. But it’s better not to be like that. So it’s better that you know you’re going to reinvest it. So you have to be clear on that. If you’re not sure, then maybe don’t have the holding company. But if you know that you are going to do another dental practice but you might need time to find it, then you can have the holding company and the holding company can be introduced in future. So one of the challenges with holding companies is, once it’s in place, it’s hard to take it out. But if you know you’re going to need it, as long as you do it 12 months before the sale, it can be put in very easily. But once it’s in it’s hard to take out. So that’s why it’s it’s sometimes better to leave it if you’re not sure, because most people won’t be sure what their plans are once they’ve sold a practice, especially if you’re just buying it now.

Dr. James: 

So makes sense. And I have another question, but I really hope I’m not jumping the gun with this one, so feel free to tell me if I am. But I’m going to ask it now, while it’s in my head, in case you don’t get the opportunity later. So let’s say and I don’t know how elaborate you can get with this stuff and how it works really but let’s say you had your dental practice company 50 owned by your holding company and 50 owned by you. Could you you get the entrepreneur’s relief on your side and then have the rest to keep as profits in the holding company for a future dental practice? So you can kind of hedge your bets.

David: 

Yes, it’s, it’s. It’s a great question, by the way. And is it possible? Yes, it’s possible, it’s possible. Oh goodness me. Yeah, the reason it’s possible is you’ve said 50. If you’d said 10, it becomes difficult. But where we’re over 25, um, it obviously needs looking at an attack, snow and some advice, um, but is it possible? Yes, it’s possible. And if you’ve got, as you said, that kind of mindset where I’m going to enjoy some of it, but some of it’s for business, um, that could be a good option as well. So it’s a really good question holy moly, that’s flipping awesome.

Dr. James: 

And by the way, just so I can bring myself up to speed here, it’s not called entrepreneurs relief anymore, right? What’s it called now?

David: 

yeah, it’s been changed to badr business asset disposal relief, so it’s a bad relief now.

Dr. James: 

Yeah, yeah, no, I remember somebody told me that it had changed. And because here’s the thing, right, the one thing about entrepreneurs oh, I did it again the one thing about bad is that nobody knows whether or not it’s actually going to be around and how long it might be around for, because once upon a time it was 10 million, now it’s 1 million and no one knows how that’s going to shift. Uh, so there is, you know, there’s, there’s an argument there that you might want to cash out some that level of money into your personal name, because, remember, that’s in your personal name, that’s 900k in your personal name. That’s really flipping hard to get otherwise without getting whacked by tax. Uh, so there’s an argument to be had there that someone might want to capitalize on that sooner rather than later, particularly with the sale of one of their earlier dental practices. But, like I say, just some food for thought.

David: 

That’s a really good point. This assumes we have BADR. Most of the parties have said they do want to look at capital gains tax, so it is possible it will change, but it’s possible and it’s not been clearly defined how it could change. So for the moment, everything we’ve said is only based on the rules as they are today. So obviously, disclaimer this could change if we get changes in tax rates.

Dr. James: 

Seems reasonable. Anyway, I just wanted to jump in with those two things. I know you were in full flow there.

David: 

No, no, that’s it and that’s really the end of the slide on it. It’s quite a simple but complicated subject and I hope it made sense for people who were listening. And any queries, obviously you can reach out later.

Dr. James: 

Cheers. Well, it certainly made sense to me, so thanks for that, David. But, David, wasn’t there some more? Maybe I’m wrong, but you know, in that previous slide you had just then was there some more advantages.

David: 

No, there was an extra, sorry. There was one more point about inheritance tax, and this is the other thing that people hadn’t been made aware of. So if you go to a situation where your company’s owned like this, so with the holding company, so the way inheritance tax works is if you have a dental practice and God forbid you cross the road, you’re hit by a bus that can be passed down to your kids tax-free because it’s a business asset. So business assets don’t have inheritance tax. Investments do have inheritance tax. Investments do have inheritance tax. So, leaving pensions aside, but if you have a property company and you you know, god forbid you hit by a bus, it passes down to your kids, inheritance tax will apply to the property company.

David: 

Where you put a dental practice and a property company together, you could potentially you’d be passing down the holding company shares and if the group is looked at together and the taxman say, well, hang on a second, you’ve got way more properties here than you do uh, dental practices that can now be deemed to be an investment group and you would lose, um, business property relief on the dental practice. So it’s important to know that there’s an extra step to think about. That, going back to the idea is it a good idea? Am I reinvesting? You have to think about you know nobody likes to talk about inheritance tax, but it’s inevitable. So you have to be mindful that if you change the group to being a trading company, to an investment group, you could lose inheritance tax, business property relief. So you know, don’t cross any roads quickly. If you do that, this is potentially the advice there gotcha.

Dr. James: 

Thanks for that. And just one more question. This might be a silly question. You might have covered this. I get why it’s a good idea to have the holding company above the dental practice company. Okay, why does the holding company have to own shares in the property company? Because can the holding company not just lend money to the property company without necessarily being a shareholder in that company?

David: 

Yes, yes, it can. So that’s why and I said at the beginning the question if an advisor says to you, well, look, have you thought about a holding company? The question I always say to ask is why have you been advised to have a holding company? What’s the benefit? What’s the reason it’s necessary? It isn’t necessary to have a holding company over a property company in order for money to be lent. That’s from a tax perspective. I have had the client say that the bank preferred that, whereas I would say well, if the bank is pushing for that, push back and potentially consider a different lender, because the banks will not consider or give you tax advice. That’s not what they’re looking out for. So, other than potential pressure from the lender, which I would push back on, there is no reason oh, I see, because I was just going off this little image here uh, are you?

Dr. James: 

I thought that can you see, right there. I thought that, uh, there was an advantage to doing that. But then I kind of played it through in my head and I was like, oh okay, so really what we’re saying is you could have the holding company over the dental practice company and then that’s it, do what you like with the money when it comes to lending, you could cut that line and not have the property company there, exactly.

Dr. James: 

Sweet, okay, cool. Well, listen, David, that was flipping awesome, I must say, actually, because that was a really nice concise summary of the pros and cons, shall we say, of Holden Coase. Thank you so much for your time today. Anything you’d like to say to wrap up on that one?

David: 

Well, thanks for listening and, as I say, if you’ve got any questions, feel free to reach out. Thanks, jack.

Dr. James: 

David an absolute pleasure, Looking forward to our next episode on the denison invest podcast already. I always learn loads and I’m sure it’s big for the listeners as well. Thank you so much for your time and we’ll speak again soon thanks, james, take care.

Disclaimer: All content on this channel is for education purposes only and does not constitute an investment recommendation or individual financial advice. For that, you should speak to a regulated, independent professional. The value of investments and the income from them can go down as well as up, so you may get back less than you invest. The views expressed on this channel may no longer be current. The information provided is not a personal recommendation for any particular investment. Tax treatment depends on individual circumstances and all tax rules may change in the future. If you are unsure about the suitability of an investment, you should speak to a regulated, independent professional.

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