Debt Repayment
The Probe - January 2007
In our experience, dentists don’t like to have significant amounts of debt. However, the right type of debt can be used to your advantage. This month we are going to explore some tax benefits of purchasing a practice with someone else’s money!
When buying a dental practice, or any other business asset such as commercial property, or Buy to Let’s, you should always try to maximise tax relief throughout the term of the loan. Let’s explore a couple of options based on a practice purchase price of £200,000, with 100% funding.
Option 1 – Capital & Repayment
- Tax relief is received on the outstanding balance of the finance
- The capital will be repaid in full at the end of the specified date
- The amount of tax relief one would receive would in effect reduce as the interest element of the loan reduces
- Interest £1,000.00 per month based on 6.0% per annum interest
- Total cost £1,288.60 per month over 25 years.
Option 2 – Interest Only
- Interest only payments made
- Tax relief at your highest rate is maintained indefinitely or until the loan is reduced or paid off in full
- Keep monthly payments low
- Over-payments should be made to non-tax efficient debts, such as residential mortgages & personal loans
- Interest only costs £1,000.00 per month based on 6.0% per annum interest.
Option 1 costs more on a monthly basis however tax relief will reduce over the years as the capital is repaid. Option 2 will reduce your overall monthly outgoings allowing you to decide where you would like to distribute the additional £288.60 per month, giving you access to greater working capital for your practice, & if you’re a higher rate tax payer, provide up to £4,800 tax relief each year. Over 25 years, you will potentially save £000’s in tax relief.
As an additional money saving idea, we have negotiated practice finance interest rates as low as only 1% over the Bank of England base rate (currently 5.0% at time of going to press) from a number of specialist lenders. This will allow you to pay less on a monthly basis, whilst benefiting for being able to maximise your tax relief. The additional savings from tax relief and monthly re-payments may be used to repay non-tax efficient debts off sooner, which in turn, will save you even more money. Or failing that you could just have a great night out each month on the taxman!!