Lansdell & Rose’s Michael Lansdell looks at the do’s and don’ts of entrepreneurial investment opportunities for dentists
One of the many things that you will have developed when you became a dental practice owner is your entrepreneurial spirit. It’s not just about making your own practice a success, but looking around the corner to see what other opportunities might be out there.
If you are a running a successful, thriving business you will attract like-minded entrepreneurs who want you to invest in their own start-up. There are a few ways you can invest and each has their pros and cons. The method you choose will likely depend on the level of risk that you are happy with. The bottom line for any businessperson is that even if you love an idea, things could still go horribly wrong. Should this happen, you want to have the chance to get something back from the deal – or at least lose as little as possible.
Buying shares using your own money is a popular way to help fund a new venture. If the company succeeds and you make a gain, Capital Gains Tax (CGT) will likely apply. If it fails, you will probably be able to claim a tax deduction for the loss against your other income, or capital gains. Another advantage when you make a personal investment and buy shares is that the company can pay you dividends – but only if/when it makes a profit. Dividends are a notoriously tax-efficient source of income.
Lending your own money is another option. Here, you can charge interest on the loan; so regardless of whether the company is making a profit or loss, you will receive a regular income from your investment. With regards to tax efficiency, the interest will be taxable at the highest rate you pay, so that means up to 45 per cent. If the total interest does not exceed £1000 (basic rate tax payers) or £500 (higher rate) it is chargeable at 0 per cent. For the new company, they will be able to claim a tax deduction against the interest that they are paying you.
What if the new company fails? Well, your loss will be set against your capital gains only – so there will not be a tax deduction if you do not have them.
Alternatively, it might be more tax efficient to help fund a new business using company money and not your own. Indeed, there are more pros to investing this way.
If you use company money to buy shares and you own 10 per cent or more of the new company, any gain you make when the shares are sold are tax exempt. If dividends are paid, the receiving company will also enjoy them being exempt from tax.
With a company loan, any loss you make if the new start-up fails can be deducted from your trading profits, chargeable to corporation tax. So it doesn’t have to make capital gains to get relief for the loss (unlike a personal loan).
A savvy practice owner might decide to combine these methods, by initially investing in a company loan and converting it to shares in a few years’ time. This could be a way of getting tax advantages while the start-up is in its fledgling phase and enjoying further benefits once the company is trading on more solid ground.
If you are asked to invest in an associate’s new business idea, this could represent an exciting opportunity that you should grab with both hands. Speak to a specialist accountant for advice on how to maximise the benefits that an investment could bring.