Doctors retain too much cash in firm

By Edie Bourne

Private practices are being warned there could be a costly price resulting from their policies to store cash. 

Many doctors could be storing too much cash in their business accounts and could see the value eroded by inflation, according to specialist financial planners Cavendish Medical. 

Doctors with limited companies will often choose to retain their profits in the practice rather than draw dividends from excess funds which would be subject to their personal rate of income tax – often at the level of an additional rate taxpayer. 

Their aim is that when the practice is liquidated at retirement, the business may qualify for Entre­preneurs Relief, which reduces the capital gains tax (CGT) payable to just 10%. 

Patrick Convey

But Patrick Convey, technical director at Cavendish Medical, explained why this could be a problem.

He said: ‘This strategy can be effective for some doctors who would prefer to pay a reduced rate of CGT rather than a substantial rate of income tax on their earnings. However, many are keeping significant sums in their business. 

‘Business accounts will be paying very little interest and the value of the cash will not be keeping pace with inflation. Put simply, your money today will have less purchasing power than in a year’s time.’

The problem first surfaced during a seminar the company ran for doctor clients early in March. 

Mr Convey told Independent Practitioner Today: ‘In addition, the rate of Entrepreneurs Relief is not guaranteed in the future nor do we know which limit will be applicable. 

‘The lifetime limit of Entre­preneurs Relief has already been reduced from £10m to £1m. We also do not know what could happen to the rules surrounding CGT. 

‘There are alternative options; for example, it is possible for the business to invest in a corporate investment account with the aim of generating a return which at least matches inflation in the medium term.’ 

Cavendish Medical is advising doctors that, as with all important financial decisions, the merit of this strategy must be carefully considered and is dependent on many key factors – there is never a one-size-fits-all option. 

Mr Convey added: ‘And, of course, money that is invested may fall in value as well as rise.  However, keeping too much cash in zero-interest accounts for several years could be particularly ineffective.’