Full Transcript
Dr Janes: 0:41
Fans of the Dentists who Invest podcast. If you feel like there was one particular episode in the back catalog in the anthology of Dentists who Invest podcast episodes that really, really really was massively valuable to you, feel free to share that with a fellow dental colleague who’s in a similar position, so their understanding of finance can be elevated and they can hit the next level of financial success in their life. Also, as well as that, if you could take two seconds to rate and review this podcast, it would mean the world. To me, what that would mean is that it drives this podcast further in terms of reach so that more dentists across the world can be able to benefit from the knowledge contained therein. Welcome, welcome to the Dentists who Invest podcast. What’s up everyone? Welcome back to the Dentists who Invest podcast, one of the first podcasts of the year, with the familiar face. Amani has become a familiar face in the podcast Balala on it, and he is here to share it today. The best way is that we, as dentists, can invest in limited companies and how we might direct the ownership of our practice. Should we do it as a sole trader? Should we do it as a limited company? All of this and more to be found in this podcast. Balala, how are you today?
BIlal: 1:48
Good James. Thanks for having me on. Happy new year.
Dr Janes: 1:51
Happy new year to you too, my friend. Thanks for penciling us in, because this is tax season, season spelled SZZM, as they do on the internet forums, or at least that I’ve seen. Anyway, I know that you’re a very busy man, so thank you so much for that. Balala, for those who don’t know you I know that you’ve been on the podcast a few times but maybe a quick intro who you are, what you do for people who have yet to familiarize themselves with you or people who haven’t seen those episodes.
BIlal: 2:17
I appreciate that, James. My name is Bilal. I’m Chief Accountant at Heathill Green. We specialize in dentists and dental practices and the whole dental journey, really From brand new associate all the way to practice, ownership and exit on your investments but we deal with people across the entire life cycle of dentistry, as I like to call it 10 out of 10 top stuff.
Dr Janes: 2:40
So, bilal, we’re talking about limited companies. Limited companies are a little bit like Blackmagic to some dentists who may not necessarily have had the time to educate themselves. Maybe you can set the scene on what we’re going to talk about today. Paint a picture. That’s really simple, break it right down, pretend like you’re explaining it to someone who has no experience on finance whatsoever.
BIlal: 3:03
So what we’re going to talk about today, james, is a popular question, so I give you a bit about my background. So my background is corporate accounting, so not sort of traditional taxis and accounting. Mine was very much. If you’re not adding value, what are you doing as an accountant? And the way we work is because we get to see what you’re doing in real time. We then make suggestions. So we will never give you investment advice. That’s not what we do. So we leave that to the professionals. We leave that to the financial advisors. What we’ll do is talk about the structure, what you can and can’t do or, more importantly, how you can do it more efficiently, because the more tax you save leaves more money behind to invest, and that’s the shittles of the ultimate. Yeah, exactly, tax planning. There’s an entire industry based on that. So that’s what we do and that’s what we’re going to do today. So we’re going to talk about not just limited company, but we’re going to talk about both sole trader and limited company, because, as we all know, limited company isn’t always the right option for everybody. The biggest thing to consider with them, obviously, is superannuation. That says the pension scheme might be the reason that you don’t want to do it, but it’s different strokes for different folks. But we talk about both aspects and the journey being the same and we’re going to look at it from both angles.
Dr Janes: 4:09
Cool, cool, cool, cool cool. That sounds really good and I’m sure there’ll be lots to learn on today’s episode. So, bilal, let’s start from the start. Seems logical, seems reasonable. Put it simply, how should we set up?
BIlal: 4:23
Cool. So it really depends on how you assess it currently. So if you’re currently a partnership or a sole trader making loads of money and you can’t operate by a limited company, then it’s how do we move your money after you pay tax to investments? Now one thing that we want to talk about here is what you invest in to generate wealth or grow is different to what you invest in your business. So we get something called an annual investment allowance. So when you go buy a new IT or scanner and you X-ray machine, things like that, they are classes investments in your business and they are tax deductible. When you now want to do stocks and shares, property or new ventures that kind of thing you have to account for your tax first. So if you’re a sole trader or a partnership, you pay whatever rate of tax you’re paying. So if you’re earning over 100, 150k, you pay 45% tax and then you’re left with the money to then go invest in and then structure beyond. That is obviously limited company being. A very popular option at the moment is, once you’ve accounted for your corporation tax, you’ve taken out your dividends, what’s left in the business, and we go through that in a lot of detail in our previous podcast, so we’re not going to sort of languish on that point too much. But it’s a case of be efficient. Don’t take all your money out of a limited company. What do you do with the amount that’s left If you’ve got no desire to invest in your business and just take all the money out every year? The limited company is probably not the right option for you, so, but this is very much dentist to invest. So I think this is geared towards a very key demographic for you.
Dr Janes: 5:45
Yeah. So I always think there’s a bit of an illusion that investing in your limited company is always the most tax efficient way to do it. It’s not always is it, and quite often times for probably for the majority of people, it’s actually cheaper. It’s actually more tax efficient to get it in your personal accounts and then invest through an ISA, sip, gia, whatever you plan to do, because, let’s not forget, when you’re investing through a GIA, general investment account, you’ve got your 12,300 capital gains allowance completely tax free and anything that is in an ISA, up to 20,000 in an ISA, yeah, you get taxed on the way in beforehand, but if your tax rate is the basic one, then it’s going to be 20% plus your, plus your national insurance, which isn’t too far off corporation tax. Anyway, you know what I mean. So, again, just as you said, we’re not going to languish on it too much. Let’s just jump back to those that are interested in limited companies. What sort of people should be looking at investing through a limited company? People with a lot of money in a company that they can extract, just like you said. Just quick, brief summary of those sorts of people.
BIlal: 6:46
So let’s talk about that then. So with the type of people that want to invest in a limited company I think you hit the absolute nail on the head in your previous statement. There is if your goal is to take all the money out of the business, whatever you invest, you need to live off limited companies. Probably not going to be the best way to do it, because first you’ve got to pay 19% corporation tax on the returns in your investment. Then you’ve got to pay your dividend tax, which is, if you’re everything we assume here is going to get the higher rate dividend tax. So you’re either going to pay 32.5% or 38.5% dividend tax, which is about 50%, whereas if you did that as a sole trader and you suffer the tax on the way in anyway, you would then pay capital gains tax at a lower tax rate. So you would either pay capital gains tax at well, we’re going to see the higher rates so you pay capital gains tax at 20% on anything over 12, 12.3k. So from how you want to extract your money, that really governs how we set you up in the first instance. The second bit to consider within that is what do you want to do long term with all of that, and then the type of investment always is really important. So I think this is a man after you on a heart crypto, if your investment’s got the ability to go 10, 20, 30x. Let’s use Bitcoin as an example. Over a year it went from 3K to, well, nearly 60K. So at the start of lockdown to the end, what did it peak at? About 60, 65k.
Dr Janes: 8:04
Yeah, it went up to about 64 K in end of February time. Of course, as of today, it’s right back down to I believe it’s 40 off the top of my head. But, yeah, highly volatile. But yeah, this is the thing if Bitcoin did a six time did it did let me just do the math on my head and over a 20 times from the start of lockdown to the beginning of February. So, yeah, definitely a Explosive asset, highly volatile. And that leads into you were just gonna. You, just before I jumped in there, you were about to go somewhere with that.
BIlal: 8:35
Yeah. So let’s talk about the tax on that. So let’s say you were gonna buy a whole coin a lot hindsight is a great teacher. But let’s say you took out 3k at your limited company and paid the tax on that. You know Nineteen percent corporation taxes paid. You then paid your future in office of different tax. You will now left the 3k to go invest in Bitcoin. That’s now gone 20x. That’s now worth 60k, for instance. That’s now worth 60k. And if you wanted to cash out, you cash the whole thing out. Your game is now 57k. You, your first 12.3k is tax free and then you pay 20% tax. So overall, you’re far better in from a tax perspective in that scenario. Then if you don’t, it’s really into company, because if you did it by a limited company, depending on your asset classification, you have to revalue your assets every year and you pay tax on the revaluation, whether you’ve liquidated or not. So if you’re if you’re on paper valuation has grown by x. Then you pay tax on that 57k at 19% corporation tax before you’ve been taking it out.
Dr Janes: 9:31
Yeah, there you go. Yeah, so it’s not always, not always assume that it’s cheaper, correct.
BIlal: 9:37
So if your goal is quick flips, immediate gains, then it’s not worth it. If you’re looking for a longer term growth and exit strategy, then the limited companies, that is, a more tax efficient structure. So before we jump on, is anything you want to add in that?
Dr Janes: 9:51
No all makes sense, and I believe as well from my conversations with accountants and people in the finance world. It can also be advisable, not just if you’re playing the long game. But let’s say you have a huge lump sum of money in your business and it’s going to be really tax inefficient for you to withdraw that into your personal account. Then that can be another instance, if I’m correct correct.
BIlal: 10:14
So the word we use that is reserves. So you’ve built up loads of reserves, so just give me a second. I just need to mute my Totally built up. Yeah, so yeah, I should give me a second.
Dr Janes: 10:26
That’s all right. No worries, my friends.
BIlal: 10:28
Yeah, we good Cool. So Reserves. So if there’s loads of cash built up in the company, what do you do with it? It can be massively inefficient to take it out, but we are going to cover that. As for one of the final points today and we talk about that on on exit and what that looks like so if you’ve got masses of cash reserves built up, what is it? What can you do with it? Okay, awesome brilliant.
Dr Janes: 10:49
So this leads very nicely into Us having a little bit of a conversation about the vehicles that we can use within a limited company, because they are much less no one. So when you’re in, when we’re talking about personal accounts, there’s only three, well, three main ones anyway there’s a sip, there is a nicer and there’s a gia. So what are the equivalents in the limited company world? What should we know about?
BIlal: 11:12
So a sip is. So you can still invest in a sip by your limited company, but it goes to you as the person. The company doesn’t have a sip. Wanting to know, when we talk about a limited company in a sole trader is a limited company is a separate legal entity, so as a separate legal entity, it can’t have an icer. So a limited company can’t have an ice I can’t have Sips or anything like that. But it can invest in them on your behalf and it’s a tax efficient way to pay into your pension on your behalf. So it’s a really good way to extract money. But for for for today’s perspective, I think one of the things that one of the most popular questions I get asked is what do I do with the money? How do I divest? So we’re going to look at four different asset classifications. Now these aren’t, these aren’t you know, by by any definition of asset classification. This is just how we’re going to break up the conversation. So the first is we’re going to talk about buying into a practice or setting up a practice, so we’re talking about growth. And we’re going to talk about buying rental properties, so we’re talking about divesting all together. We’re going to talk about stocks and shares, how you invest in other companies. So we talk about passive income and then we’re going to talk about crypto, which we’ve already touched on, but, james, you’ll be the man leaving the way on that one. Awesome, looking forward to it. Good month. So if we jump into buying a practice now, I mean you could probably give me some more flavor on this. How popular do you think this is as a, as an option bought for most dentists today?
Dr Janes: 12:36
Real quick, guys. I’ve put together a special report for dentists entitled the seven costly and potentially disastrous mistakes the dentist make whenever it comes to their finances. Most of the time, dentists are going through these issues and they don’t even necessarily realize that they’re happening, until they have their eyes opened, and that is the purpose of this report. You can go ahead and receive your free report by heading on over to wwwdentistsoninvestcom forward slash podcast report or, alternatively, you can download it using the link in the description. This report details these seven most common issues. However, most importantly, it also shows you how to fix them. Really looking forwards to hearing your thoughts Diminishing, but still still on the radar. Don’t have any figures. Maybe that’s a poll that we could make at some point on dentists who invest, who would like to buy a dental practice, anybody who? Who among us who has never owned a practice, would still like to buy a dental practice in 2021? There’s an interest in Paul in the making. I would say anecdotally, maybe 10% 20% of associates around about my age group 30s, late 20s would be interested in doing that. No hard figures, but there’s a poll in the making.
BIlal: 13:58
I would agree with those numbers. So, starting from our client base, we see that that sort of percentage, where it’s I think statistically it’s something like I think it’s one in one in 30 We’ll go on to make something a quarter million a year With that one in 30 it’s. It can be a mix of a really specialist associate or practice owner. Now practice ownership is becoming well, I say becoming from our client base is about 20% that do want to make that step. Will they make that step is a different thing altogether. And then, within that is, what type of practice will they buy? So if you’re like our friend Javier, he will not touch an NHS contract with the laminated barge pole. So it’s, and I think that’s becoming a more popular way to go. I mean, I put out a poll on my Instagram recently asking would you consider opting out the NHS at some point? So if you’re an associate dentist at the moment stepping away from NHS, would you then make that step into NHS acquisition? It’s unlikely, but would you still set up a squat practice or a boutique clinic that specialised in a range of private treatments that has proven to be really popular, especially right now through a limited company where you get the super deduction where any investment you make in your practice, where historically you get 19% corporation tax relief, that’s been uplifted to 24.7%. So you’re getting back. You’re getting a tax deduction of 24.7p on every pound you invest in your practice. So that’s becoming a really really, really attractive option at the moment. That’s certainly a path that we’re going down. So my wife’s a dentist. That’s the path that we’re going down. So we tried to buy an NHS practice into a 19. The numbers didn’t sit well with us and then sitting back and having a look and saying, well, is NHS the way we want to go? Can we create a brand on the back of that? Probably not, but it would have been quite helpful during COVID. But that’s sort of unique circumstance. We don’t go through that. So what we’re going to look at, then, is buying a mixed practice, because if you went purely private, then you just do the latter part that we’re going to talk about. But let’s put for balance. Let’s talk about purchasing a mixed practice. So when we’re going to talk about a mixed practice, we’re going to talk about three components or four components within that which would be the NHS contract. It’s the private revenue based on the back of that plus the goodwill, and then you’re going to buy those two numbers intertwined because you can’t value the private element but you can’t value an NHS contract because it is what it is. And then you get the land and buildings. So if you’re acquiring the freehold of the property as well via mortgage or loan, however you’re buying it those generally the components you’re buying. So you buy the NHS contract, you buy in the private goodwill and you’re buying the land and buildings, the freehold. So if you were a sole trader today or if you’re an existing dental partnership and you want to buy another NHS contract, you can either buy the whole thing and then continue to run it as a partnership, and then you pay tax at the higher tax rate for anything you extract over 150K. However, from an investment perspective, you can treat that acquisition as in its individual components, because your biggest hurdle to overcome is the first bit. That says if you’re an existing NHS practice owner, you’re already maxing out your superannuation contribution that you could pay to your pension anyway. So you get tape and relief on the back of it anyway. So would you then buy your second practice as a sole trader or a partnership? Probably not. It’s less attractive at that point the second hurdle to all becomes whether the PCT will even let you buy as a limited company. And if they do let you buy as a limited company, they might suppress the UDA value. So if they then suppress the UDA value, you’ve now got to reevaluate your numbers to see even if it’s worth buying. And is it worth buying at the rate that you agreed it at? And the seller’s less likely to remove their price because you’re trying to buy through a limited company, because that becomes your problem, not the seller’s problem. So let’s come back, let’s say the PCT say no, we’re not letting you buy as a limited company. You can still depend, you can work with your lender to buy as a separate components. So you buy the NHS contract and you run that as a partnership or a sole trader and you pay your rate tax on it. You buy the private and the goodwill through a limited company and you buy the freehold of the land and buildings through a limited company as well. There are two separate limited companies and we’ll go on why they’re separate limited companies when we talk specifically about rental properties. But that’s three separate components that you can now purchase In this example. If it was, say, a practice generating half a million pound profit and let’s say that was split 50-50 between NHS income and private income, that’s 250 going to your sole trader account, of which you’re paying 45% tax because you’re earning over a 50K. That’s 250 going into the limited company now and in that scenario, instead of paying 45% tax on the private income, you’re now only paying 19% corporation tax on the private income and that’s a cash saving of about 65 grand. That leads more money left over to pay to subsequently invest in other ventures. Subsequently, the limited company also owns the land and buildings which it now gets to charge rent to the partnership or the sole trader and the private element. So that’s now rental income going into your rental property portfolio, which is now also attracting 19% corporation tax. So you’re creating these little pockets of investments just from one acquisition, which then says if James now wants to go buy subsequent properties, you just buy that through James Martin properties. If you now want to set up a squat practice somewhere that, just as in this line in cosmetic dentistry, you’ve got the reserves built up into the dental limited company which you can use the funds to go do that, and then with that there’s other considerations. There’s legal considerations, the CQC registration considerations, because you’ve got to run. You’re running two separate practices under one building. So the private’s considered it’s on practice and the justice’s considered it’s on practice. But you’ve now got to split them up. That says they are treated as separate businesses, separate CQC registrations. Bit of admin that goes around it. But for 65 grand I’m sure we’ll find a way.
Dr Janes: 19:55
That is so clever. How common is that setup?
BIlal: 20:00
It’s fairly common on entry. So this is what we do. I mean, this is what we assume. I’m quite evangelical about this is if you speak to your accountant ahead of time, it’s very easy to set up. You work with your lenders, you work with a buyer it’s all quite easy to set up. However, if you bought it and then want to try and undo it, it’s quite expensive and it’s probably not worth doing it that way. And then if you’re an established practice, there’s so much to consider if you’re trying to then make those changes in real time because if you’re now an established practice, you want to make a sale, you’ve got to buy the taxes and capital gains that you’ll incur can become quite expensive. But the first step you can take is splitting out your private and your NHS income, and that is open to most existing practices. There’s just some work that has to be done around how you transfer some of the costs, like your OVED costs, for instance, like how do you recharge your nurses over to how do you split your revenue, your OVED costs, according to the split between NHS and private income. So bit of admin that goes in the back of it. But we are working on an example at the moment and I quite enjoy these kinds of things because it’s mental arithmetic and it’s quite fun.
Dr Janes: 21:12
That’s awesome, okay, cool. Anything else you’d like to say on that, or shall we move on to property?
BIlal: 21:18
So one thing I want to talk about just before we move on to that is when you’ve got that set up. So let’s say you’ve gone into this set, you bought your practice, you now got your three individual components. If you now want to sell and let’s talk about exit is if you want to sell the NHS contract, you can. If you want to sell all three components, you can. If you want to sell each individual component, you can. So you could sell the private separately, you could sell the NHS contract separately and you could sell the land and building separately. Or if you’ve come to the point in your career that you now want to live the passive lifestyle and you’ve generated enough wealth to now use that wealth to do what you want, you could keep the land and buildings, still charge the new owner the rent for the building and they would buy the NHS and the private portfolio off you. So this is where it becomes quite tax efficient on the other end, because if you were to do that for the limited company, you’d only pay 10% tax on liquidation shares. You would pay your capital gains tax on selling NHS contract. You haven’t sold the property income. When you’re doing things like that is if you were going to sell the private limited company back to whoever was going to buy it and claimed entrepreneurial relief. You can’t go back to that trade within three years, right, okay? So these are all really really important things to consider, but I think that sort of draws alignment to that one that says whether you’re currently in an NHS con, whether you’re currently a sole trader or currently a limited company, those options still exist to you, because if you’re currently a limited company and you’ve got all these cash reserves built up, you can use all of that to buy it. If you can’t buy all of it, you can buy the individual components. If you’re currently a sole trader, you can again do the same sort of setup. You’ve just got to split everything else out.
Dr Janes: 23:06
Right, awesome, super interesting, Okay, cool. So I believe the next thing we were going to segue into was property.
BIlal: 23:13
Yeah, so property is really, really straightforward. So there’s a post on my Instagram about buy to let’s on and the tax implications investing into a buy to let. And again we’re assuming everyone’s a higher rate taxpayer or intermediate rate, so not the basic, not the 20% rate. So we’re either looking at 40 or 45%, but for simple math we’ll look at 40%. So if you’re currently, if you’re looking to invest in a buy to let property and you go buy it in your own name so James doesn’t buys a rental property generating 10,000 pounds a year in rental income after expenses expenses are sort of minor for things like, you know, maintenance, insurance, legal fees, things like that you can not only claim your interest as an expense. Right, if your mortgage payments and we’re talking interest only mortgage it if your mortgage payments amount to, let’s say, 5,000 pounds a year, historically it’d be 10,000 pounds worth of profit, 5,000 pounds worth of expenses, and then you’d pay tax on the other 5K. So the other tax on the other 5K at 40% would be about two grand. However, you can’t do that anymore. So what HMRC says? We’re going to tax you on the whole 10K, regardless of the interest payments now, so you’ll get tax on the whole amount, so it’s 40%. On the 10K, it’s four grand. Then you get a 20% flat rate relief on the interest payments. So in this example, so you’ve got 4K tax, your interest payments come to 5K. You get 20% of that. It’s not profit taxable, so you pay 3K in tax now. So it’s cost you a thousand pound a year more to run it that way, whereas if you had bought that same property via a property limited company, the company can claim the interest as an expense. So straight away, we’re now comparing tax on 5K as opposed to 10K and the company only pays tax at 19%. So that’s more cash left over. I’ve got a detailed example on my Instagram so, which is at Ethel Green, if anybody wants to check that out. But fundamentally that exists. So limited companies can claim the interest, pay low rate corporation tax. Sole traders can’t. Now, within that is really is do you need to live off the income? So if you need to live off the income, then it’s probably not going to be worthwhile because you pay 90% corporation tax. Then you’re going to pay 32.5% dividend tax, so 51% versus the 3K odds and sods. It’s not going to be worth doing. Buy in your own name, it’s fine. If you look at the longer term strategy and this is what my wife and I do as isn’t to live off the income, as is to live off the income when we retire and have something to pass to our kids, because property prices are only going one way and it’s getting harder and harder to get onto the ladder and we don’t want our kids to face that position. So we will hand that to our kids, which will go on how we do that at a later date. So our strategy is not to have the rental income to live off now, but it will be at a later date. So at a later date, theoretically we’d be under the 50K threshold, so our dividend tax on that would only be 7.5%. So it’s worth doing at that point. So just sort of go back a step. If your goal is to invest in property, live off the income, do it in your own name. If your goal is to save for the future, then do it by a limited company, because then any proceeds you’re now generating at the lower tax rate, you can now reinvest back into your business and buy subsequent properties. Furthermore, if you’re a limited company and you’ve got reserves, you can loan the buy to let company the deposit to buy subsequent properties, and that’s what you do with the reserves. So James Martin properties will owe James Martin dentistry or James Martin crypto king the deposit amount, and that’s how that money moves back and forth. I know the name of a limited company. Look at all these pieces right there. Goodन, if you’re currently a sole trader and you want to invest in buy-to-lets, then again set the limited company, if that’s the way you want to go, and you can loan the money there. And let’s say you loan the buy-to-let company 50K and you want to take 50K back out. That’s a loan repayment, not income, so you don’t get tax money. So that’s quite important.
Dr Janes: 27:14
How do the terms on that work then? Can you loan it to someone indefinitely, or does that have to be some sort of minimum repayment by law?
BIlal: 27:21
So it has to represent market terms. So it’s something called an arms-length transaction that says if James has been alone me money, it would have to be on the same terms that James would loan himself money. So it’s referred to an arms-length transaction. So it has to represent market terms.
Dr Janes: 27:38
So Bank of England base rate.
BIlal: 27:41
Yeah, plus or minus a couple of percent. So why you would have to do that through a separate limited company is more from a risk perspective from the lender. So it’s not because we want to charge more fees, it’s mainly because, from a risk perspective, a lender doesn’t want to see any of the trade going through that. So if you were to buy it through your dentistry limited company, a lender will see that as too high risk because their investment could be put at risk by any sort of litigation or anything like that. So they want to see a separate limited company which has no other external forces against it which they would then lend against. So that’s the only consideration when looking to invest in properties via a limited company. That’s the standalone limited company and, for those of you wanting to Google it, it’s an SPV or a special purpose vehicle.
Dr Janes: 28:26
So, bilal, all this talks about stocks leads us in very nicely to where we outlined. This conversation is going to go next, and that is, of course, how we might invest in stocks through our limited company.
BIlal: 28:37
Cool. So it’s a really straightforward process. So wherever previously there’s quite a bit of complexity with SPVs or how you purchase a practice, it’s actually dead straight forward. With stocks and shares, your account just has to be the name of the limited company. So if you’ve got these masses of reserves and you want to start investing in other companies, you can use the assets that exist for that sorry, the reserves that exist to buy those assets. So if you’re buying stocks and shares, dead straight forward, the account just has to be the limited company’s name, because the limited company is the person that owns the wallet, the exchange, the account and you can go and invest. So there’s no restriction on the things you can and can’t invest in. It’s just the companies that will. You might be restricted on the companies that will do it for you, but your mainstream ones you shouldn’t have any issues doing that with. But then the way again with limited companies, how you measure the value of an asset classification is you have to be consistent across all the assets. So you couldn’t say, well, I’m going to treat these ones differently to these ones and these ones differently to these ones. So if you want to, if you revalue your assets every year in revaluing investments and if that investment’s gone up then you pay corporation tax on the gain. If it goes down, then it offsets your corporation tax you’ve made elsewhere. So you could be quite smart with it as well if my business has made it an absolutely astounding year, but my investment portfolio has actually taken a bath. You can offset one with the other.
Dr Janes: 30:05
That’s awesome, and it’s important to mention as well that that would only occur you would only pay corporation tax if you crystallized the gain. No, oh, I’m going to ask that then, because that’s just things.
BIlal: 30:19
It does change things. So this is what I was saying about when you treat an asset classification. So if your treatment on asset classification is, I will revalue my assets on disposal, then you value them as and when you can resell them. But you have to treat every single asset that fits that classification the exact same way. Otherwise, if you say, for tax purposes or for business purposes, I want to revalue my assets every year and I think about growth, think about trajectory. Think about if you’ve put 10,000 pounds down on investments now worth a million pounds, you now want to borrow against that, the lender’s going to want to see your balance sheet showing that million pound asset. Therefore you have to revalue it Now. If you then revalue it, then you’ve made a gain which then has to be factored into your tax calculations.
Dr Janes: 31:06
But then would that not mean that if you own a property through a limited company, that if the properties value appreciates that, you owe corporation tax on the amount that it’s appreciated by? Is that correct?
BIlal: 31:18
You made a gain, yeah, so which is why some people, which is why SPVs come into hand you don’t revalue your asset.
Dr Janes: 31:25
Right, I’m learning so much today. This is gold, awesome, okay, cool. Anything else you’d like to say about stocks?
BIlal: 31:33
Again, it goes back down to what your goals are. So if you’re betting on Tesla and I say betting is not the wrong word if you’re investing in Tesla and you’re expecting it to gain, to take the money out, then think about it on what the potential growth is, the volatility, what your investment strategy is, Because if the gains far outweigh the initial tax hit, then you’re better off taking the money out and investing into your own name. But again, it all depends on what your strategy is.
Dr Janes: 32:00
Wow, so something to think about. 110% you said the C word a few times crypto. How would you advise investing in crypto in a limited company Anything we should be aware of.
BIlal: 32:12
So this is not advice, this is how, not advice on how. So just to, protect myself. So crypto is a really, really, really, really, really interesting one, mainly because the potential gains on offer are far more tax efficient to pay the personal tax on them. Now let us take a step back here, because crypto was the last one in the structure, so what we’ll talk about is risk. Whatever you invest in personally, if it goes the other way and you leverage the trade against it, you’re liable for the other end of it. Now, if you did it through a limited company, a limited company is a separate legal entity to you personally. Therefore, if that limited company starts racking up loads of debt, it’s the company that’s liable for it. Yeah, so it’s terrible, but if you started doing some very risky bets on crypto and you went the other way and it was by a separate limited company, you could just shut down that limited company. It might well it probably will impact your ability to act as a director for other companies. You might get disbarred, but then your other assets are still protected, and that’s the way to look at it, and we’re going to go into that in a bit more detail as we wrap this up. But crypto is a really interesting one. So, if we use the example of Tesla that bought a boatload of Bitcoin. When they made a gain, it increased their corporate position because they had all this money. Then that made their balance sheet look better because they’ve made all these ridiculous gains on crypto. And then they start liquidating their position. They sold a little bit, but then all that is then taxable gain and, conversely, if it went the other way, it would have reduced their tax position. But it really depends on what your goal is. If you’re just going to hold and sit on it forever, if you’re trying to buy penny crypto and see where it goes in 10, 15 years, buy it in your own name. The CGT position is far better than the corporation tax position because you paying a minimal amount on you. Paying 32% dividend tax on a very small amount of money that could potentially go 20, 30x is far better than doing it through the limited company. Saving the 19 cent corporation tax, then taking it out.
Dr Janes: 34:22
Yeah, here you go. Question Bilal as well, because of the crystallized gain thing, would that mean that you have to revalue your crypto every once in a while? Does it not work like that?
BIlal: 34:32
No for personal taxes. Different for so companies don’t pay capital gains tax, companies just pay corporation tax. There’s no capital gains for a limited company.
Dr Janes: 34:38
Oh, sorry, in case that wasn’t clear. I meant within a limited company.
BIlal: 34:41
Yeah, yeah, yeah. So it’s just, it’s crystallized gains, it’s gains as revaluation, depending on what your position is. If your policy, internal policy is only revaluing disposal, then you would pay the corporation tax on the disposal of the assets.
Dr Janes: 34:57
No, I get it. That’s awesome. Thank you so much, brilliant. Well, we’re tying up a lot of loose ends in my mind today, because these are all questions that I had about limited companies. This is awesome. Anything else you’d like to say about crypto?
BIlal: 35:12
No, not on that. I think you’re the man on crypto. I am very much a novice in that In that regard, so we’ll park that one. There’s two things I want to talk about is different investment classifications and, again, sole trader, limited company, and I think I want to go on to structure at this point.
Dr Janes: 35:28
Awesome, okay, let’s jump straight in with that. Then, with two feet in both hands, structure, let’s go.
BIlal: 35:34
So when we talk about corporate structure now, whether your entry point into the structure is either the sole trader or a limited company is neither here nor there. But where are our last podcast left? We’re not the last podcast, the one where we talked about sole trader versus limited company, because the last thing we spoke about on that was structure and we touched on it very briefly, so want to use this opportunity to talk about it a bit more, because it was a very popular topic is, when we’re looking at a limited company, we’re looking at risk. So how do we be risk your position? So if your core business is dentistry and that’s where you make all your money and that’s where all the volatility is, and it is volatile because it’s deeply litigious and there’s things that is, external factors that could influence if someone sees you with vicarious liability and all that going on at the moment as well. So if you now start making investments in property limited company sideways is JM Dentistry loans, jm Properties 100 grand to go start buying properties. If JM Dentistry is ever sued technically, on JM Dentistry’s balance sheet there’s a loan that’s owed to it, so someone owes it money. Therefore, they can recall that loan if you were ever sued to then. But then you would have to liquidate your properties to repay the loan, to then pay it back. So that’s where the risk factor comes in. How we do risk, that is by putting a holding company so what the holding company does is it owns all the shares in the subsets. So you no longer own the shares in any of the companies other than the holding company. The holding company never trades doesn’t mean hold a mobile phone. We never expose the holding company to any form of risk. So when JM Dentistry makes 100,000 pound profit, pays its 19,000 pound corporation tax, 81,000 pound leftover. That gets paid up to JM Holdings as a dividend. It then pays that down to as a loan to the property company. So if an, if an elated date, and now let’s say JM Dentistry becomes a squat practice somewhere where you’ve said you’re on boutique private dentistry, if you wanted to sell that, there’s no other loans to factor in. So someone buying that will say, oh this, why is it owed a million pounds from this and it’s very finicky to unwind all of that, whereas that’s where the structure is and from a risk perspective is. You can then sell off individual business units for the money it goes up to the holding company. Now, from a long term perspective, depending on your strategies, I’ve got two kids. My mind is very much focused on what can I leave behind for them in the most tax efficient manner? Is any dividends now earned in any of the companies or go up to the holding company? I then extract my 50K, my wife extracts her 50K Once my kids are over 18, I can then add them as shareholders and directors of the holding company and I can pay for their university fees through the holding company. That’s built up its reserves. As I then pass on and I decide I want to now hand over my business interest over to my kids, I sell them my shares or I gift them my shares from an inheritance tax planning which is a separate podcast altogether. So from an inheritance perspective, I’m no longer giving one of my kids two properties here which has got capital gains tax implications and inheritance tax implications If I gift it across their lives, seven years. Trying to unpick all of that becomes far more difficult than just handing over shares in a company. Now, from a trust perspective and again this is probably a separate podcast is I could move all my shares into a trust from the holding company which owns all the subset. So while I’m living, I still benefit from the income that’s generated Once I pass on. And then the trust is enacted. And this is where the longer term implications become really, really, really interesting is you know, if you want to close everything down, close off all the entities and you own the shares and all the entities and all this cash that’s built up into them you can. Then you just liquidate the shares so you shut it all down, shut down everything, and then you’d pay 10% entrepreneurs tax, providing providing you meet the conditions for that, and then you sit off into the sunset with all your cash. But I think for me personally, I don’t think that’s. I think that’s a great idea, but I don’t think that’s ever done that way. Not very rarely is is. Is everyone liquid at the entire portfolio? Because it doesn’t make sense. I mean, I’m probably put out a reel about this. There was a wealthy land baron who passed, so I think it was in the last decade or something, left 9 billion pounds worth of property to his son, who was 21 at the time and paid zero tax, and that’s that’s why the system exists Now. Whether you’re a sole trader or a limited company, the holding position could still exist, because if your holding company was the one that you owned, your property company in your crypto, but all your income is still earned from a sole trader, it’s the sole trader that makes the loan to the holding company and it owes, and then it still has its subsets, so that structure can still work. It’s just where does that initial source of income still come from, and then so, from a structure perspective, that can always work. So this is where holding companies become really important to do you risk your investment strategy and also how to move money around between the entities and then how to exit any one of the individual business units.
Dr Janes: 40:13
Yeah, 110 cent trust and inheritance, planning something to get an accountant or somebody knowledgeable and finance involved in. The sooner the better, and I do want to do a podcast on either both those things together or as two separate podcasts at some point. So, yeah, that was something I will explore. And then, bilal, you also wanted to explore, there was one more thing that you mentioned just before you talked about what we just spoke about.
BIlal: 40:38
So it’s a fun side. It’s the. It’s the exciting side here now, and I my view of exciting slightly different. It depends on what you’re, what you want to invest in. Now, if your thing is watches, then there’s certainly best in classifications that as they grow, there’s no tax due on them. So if you bought a Rolex at retail for £7,000, you sit on it for 15, 20 years, it’s now worth £60,000, but you’ve worn it, it’s fine. Once you go to sell it, no tax due, which is why watches are massively popular. Same with some vintage cars. But if it’s your car, the certain classification, the certain criteria you have to hit, it can’t be a garage creep, you have to drive, it has to be short, so and so forth. If you bought a career GT, for instance our cars might be you think, let’s say, let’s say you bought a career GT for a steel £250,000, you bought it for £250,000, you then sell it for £500,000, no taxes due. Same with art. Art is NFTs and art I’m not going to get into that. But the money laundered, that’s a bit. But. But from an asset and certain asset classifications where no taxes due, should you make a gain? From a personal perspective, from a limited company they are. So let’s talk watches. If you were to buy Rolexes through your limited company as investing pieces, as the director of a limited company, you have something called fiduciary responsibility, so you have a responsibility to look after the income, the expense and the assets of the company, as in the benefits of the shareholder. Therefore, if you’re going to go buy all these Rolexes and you need to put into a safety deposit box, you can claim that as an expense. The insurances, maintenance, servicing to keep the asset in good life, good nick, you can claim all of that as an expense.
Dr Janes: 42:18
I see, I see, I see, I see. Okay, good, and now it’s worth having a conversation with your account.
BIlal: 42:25
Exactly, which is just sort of wrap all that up. There’s no one size fits all. It depends on your investment strategy, depends on what your long term goals are. Your mean term goals are the kind of asset you want to invest in and your risk profile. All of that then factors into the kind of things you want to do. But ultimately, the goal for this was to say there’s more than one way to skin a cap.
Dr Janes: 42:45
I love it and you know what. So much gold dust in that podcast. Today, bilal, we’re coming up to the 40 minute mark. Is there anything that you’d like to say? Just to draw a line under proceedings today, just to put a cap on it.
BIlal: 42:57
No, I think, like I said, you know, these are very much blanket statements. If you want to know how any of this could benefit, you feel free to reach out to us. So messages on Facebook it is. It is my account that you’ll see on the Facebook account. So, bilal Ahmed, if you head over to Instagram at Heathkill Green, you’ll find us there. We put out loads of content, loads of videos on things that you might find useful. There’s a link in my bio that says if you do want to sit down and have a chat about any of this, feel free to book in. And then I think I, if I had hair, probably lose it, but I think it’s contributing to a lot of the whites of my chin is April is the best time to start reviewing your position. That says the tax year starts in April. So March is where you want to sit down and have a chat with your accountant. Have a chat with us, see, use it as a health check that says you want to hit the next, the ground running and pro activities. Key is don’t do something, then try to work out how you’re going to undo it afterwards. Do it properly at the start and then it makes life easy for everyone involved.
Dr Janes: 43:54
Thank you so much, bilal. I hope tax season isn’t too overwhelming and we will catch up again very soon, in a bit. My friend, if you enjoyed this podcast, please hit, follow or subscribe so you can stay up to date with information on new podcasts which are released weekly. Please also feel free to leave a positive review so others can learn about this podcast and benefit from it. I would also encourage any fans of the podcast to sign up to the free Facebook community from which the podcast originated. If you want to search Dentalists who invest on Facebook, and hit join to become part of a community of thousands of other dentists interested in improving their finances, well-being and investing knowledge. Looking forward to seeing you on there.