Financial stories make good press and it is usually the negative ones which reach the front pages with happier news given a second billing. The same applies to social media and TV news and, as a result, it is easy to be indecisive when making financial decisions or plans.
From experience, the dentists who are most financially secure when approaching retirement and beyond are those who made simple but positive decisions with their money, probably relatively early on in their careers. The perfect investment/tax scheme/property goldmine is a rare thing so to defer financial decisions in a quest for it is usually a bad idea. Similarly, if you are planning to accumulate savings and investments over the longer term, waiting for the perfect moment to invest is unlikely to be the right approach. What positive conditions prevail in 2017 that should encourage dentists to take action?
Practice values at a record high
For dentists considering their exit strategy, the value of goodwill could be a significant advantage. Goodwill values have risen steadily in recent years and despite rumours about the potential impact of new contracts, have stayed at a record high in recent months. Dig a little deeper and the ‘value’ picture is not quite as clear, with a disparity in values depending on the type of practice and its location. However, the overall trend on values has been upward. Generous ‘Entrepreneur’s Relief’ (ER) allows dentists to sell their business (and connected commercial property) and benefit from a reduced rate of capital gains tax of only 10%. Such rates are always subject to future treasury legislation and changes to tax rules could remove this. Acting now to take advantage of ER may therefore be advisable.
Banks still lending on practice purchases
If you plan to buy a practice, you may be disparaged by my comments on goodwill values. However, it is worth considering that interest rates are at an all-time low. With bank base rates at 0.25 per cent, the cost of borrowing is affordable for many. Furthermore, many banks see dentistry as a low risk sector and remain keen to lend. I still advise caution when considering a purchase. It is advisable to obtain projected profit and loss accounts from a suitably qualified dental accountant on your ‘target’ practice. Consider using a specialist dental finance broker to ensure you get the best deal which could include fixing at current low rates.
Pension tax relief still available
Despite much speculation, dentists have access to generous tax relief on pension contributions. This is restricted to a maximum £40,000 gross contribution per annum, which is sufficient for many. Those with income in excess of £150,000 will have restricted tax relief. NHS ‘deemed‘ pension contributions will also need to be taken into account when assessing the limits. Seek specialist advice if you think you may breach contribution limits and/or withdrawals limits.
Investment returns at record high
The main UK and US market indices are hovering around record highs. Put simply, money invested in the FTSE 100 has doubled in value since 2009 and tripled in value for a similar timeframe in the US (Dow Jones index). I don’t recommend you invest simply on past performance, although historically over the longer term stock markets consistently outperform cash on deposit and other lower risk assets. For those investors with at least five years to invest, a risk based approach is worth considering in order to beat inflation.
Specialist advice available
The dental industry contains more specialist professional advisers than ever before. For most dentists, the proliferation of specialist advice is an advantage as it has helped to keep professional fees competitive. I advise caution – ensure that the professional you chose is suitably qualified and is not one of many advisers claiming to be a dental specialist. Four key questions should be asked of a potential adviser:
- Can they demonstrate specialist knowledge?
- Do they have appropriate professional qualifications?
- Are they independent or restricted in their advice?
- How long have they operated within dentistry?
Tax rates stable
I await keenly the Chancellor Philip Hammond's, first budget on 8 March 2017. Personal tax rates have remained relatively stable in recent years with top rate of tax settling at 45% for those with taxable income in excess of £150,000. Company directors have seen an increase to dividend tax, although corporation tax is expected to fall further by way of compensation. On the whole, UK tax rates remain highly competitive in a European context.
2017 no different
Each year many dentists fail to use the basic allowances provided by the government to encourage regular saving. Whilst ISAs (Individual Saving Allowances) and pensions may not be exciting, they should probably be the cornerstone of your financial planning. Paying even a modest regular contribution towards these two financial plans could make all the difference over the longer term. Money saved in an ISA remains accessible at all times so is available for a multitude of uses – education funding, early retirement etc. I suggest you take independent advice and it is reviewed regularly.
Geo-political shocks could have been worse
The economic catastrophe that was widely predicted following the Brexit referendum in June 2016 has not transpired. While some commentators feel there are tough times still to come, few predict financial meltdown. It is too early to predict the long-term effect on the global economy of the election of President Trump but some commentators believe the worst reactions have already occurred.
This year has started on a relatively positive note despite some potentially significant hurdles. While there will no doubt be bumps in the road, I advise that you don’t defer making financial decisions based on what might happen. Long-term financial and business planning should be sufficiently flexible to absorb economic and political shocks.
About the author
Jon Drysdale is an independent financial adviser for Chartered Financial Planners PFM Dental.
For more information visit www.pfmdental.co.uk