Spend, gift or invest. What to do with your money when you’ve sold your practice
After years of building your practice, and finally completing the sale of the goodwill, most principals will look forward to seeing a large lump sum credit their bank account.
It appears that the practice sales market is buoyant at the moment, and over the last few months, we’ve certainly seen an increase in enquiries from principles who are selling. Luke Moore, from practice sales agent The Elite group believes “the market overall is definitely more active than it has been”, and that there are a number of reasons why, including: dentists who had intended to sell during the COVID year but didn’t because the market was in a state of flux are now doing so; and because the pandemic has changed many people’s priorities, and some are deciding to sell early whilst the market is strong.
Based on discussions we’ve had with principal dentists over the last 20 years and the financial advice we’ve given about how to manage a lump sum post sale, I’ve summarised some of the relevant points that most dentists need to think about.
Cash needs
The first step is to work out what your cash requirements are likely to be over the short, medium and long term. Short term – as well as setting some money away for any capital gains tax liabilities, you might want to allocate some for fun (see section below), or for example renovating your house or buying a second home. You’ll also need to work out how much you need in the medium term. This tends to be the first 5-10 years after sale, before you start drawing a pension from your NHS, personal and state pensions. Longer-term, although your monthly expenses are likely to eventually reduce (for example if you downsize, stop driving, or travelling abroad), it’s also important to factor in care costs which can be up to £2-3,000 a week.
Fun
We often encourage clients to do something special to mark the new chapter of their life. We have a client who’s a massive tennis fan and is planning to buy Wimbledon Debentures – I’d never even heard of these, but they entitle you to a premium seat on Centre Court or Court No.1 for The Championships for five years, along with parking and the use of exclusive restaurants and bars. You also have the right to transfer or sell your tickets on. It’s a great idea if you like watching tennis. Another client is set on buying the Ferrari 296 GTB after the sale of his practice – and after a 38-year career in dentistry, his wife says he’s definitely earned it!
It doesn’t have to be tens of thousands either - one client bought an expensive fountain pen for a few hundred pounds, I guess he feels he’s already got everything he wants and that spending more won’t make him any happier. One of our clients is determined to gift 10% of the practice sale value to charity – a very worthy goal if you know you can afford it.
Mortgage & Loans
Any practice loans will have been paid off on completion, but it’s fairly normal for retiring dentists to still have a mortgage on one or more of their properties. Is it right to pay these off? Certainly, there’s a psychological advantage in paying off debt as you approach retirement. However, it’s important to think this through carefully, as once you’ve paid off your mortgage, and used up some of your cash savings, it’s not necessarily easy to get another mortgage. Firstly, because your income in retirement may not be as high, but also because lenders are strict about what you’re planning to do with the money. We have one client who’s deliberately kept his mortgages high during retirement, so they have sufficient funds to live the life they want, and can be generous to their children now. The added advantage of this strategy is that the mortgages will be deducted from their estate on death, which in turn reduces their inheritance tax liability.
Second homes
A popular option for many is to buy the second (or third) home they’ve always wanted – perhaps by the coast, in the country, or even overseas. It’s crucial to work out the initial and on-going costs and the impact on your disposable income in retirement. Some clients of ours were considering buying a luxury villa in Mallorca, and realised the purchase costs (agents fees, taxes) were over £120,000 and that they’d be better off just renting a villa for as long as they wanted whenever they wanted a holiday. This also means they feel comfortable travelling to other countries as well.
Gifting to children
Principals selling in their 50s & 60s often have children that are just buying their first house, or considering upsizing to a larger family home. This could therefore be an ideal time to gift some cash to the next generation. Provided you survive for 7 years after making the gift, you can also reduce your inheritance tax liability. Of course, when you’re gifting significant amounts of capital, I’d recommend you do the maths first and work out how much you’re likely to need throughout your retirement.
Invest
Once you’ve spent or gifted some of the sale proceeds, most clients are keen to invest some money to generate an income, protect the capital from the effects of inflation, and create a nest egg for potential care costs. So where should you actually put the money?
One popular option is to build a property portfolio. As well as providing an income stream and potential capital growth, a key advantage to investing in property is that you can mortgage them, making your cash work even harder for you – although this does increase the investment risk. As an owner of several investment properties, and having experienced tenants trashing houses, void periods, evictions and moths (don’t ask) I don’t have any particular desire to be a landlord in my retirement. However, I accept they can be a good way to diversify your investments and if you’re prepared for the additional work involved and lack of liquidity, it’s certainly a good option for some.
Building an investment portfolio
If investing in property isn’t for you and you want to design an investment solution, you can build an investment portfolio that allows you to replace your income and live comfortably for the rest of your life.
I would start by completing an investment risk questionnaire. This helps to gauge your tolerance to investment loss and is one of the key factors to help you decide how much risk you should be taking with your capital.
A typical investment solution that we would then build for a dentist who’s recently sold their practice could look like this:
Bank account – enough funds to cover day to day expenses, holidays and ensure you feel comfortable financially. The actual amount depends on how much you tend to spend, and your monthly pension income.
Premium Bonds – You can deposit £50,000 with NS&I and have the chance to win prizes in their monthly draw. The return is likely to average about 1%, so it’s not a great rate, but the prizes are tax free, you could be one of the lucky £1m winners, and you have immediate access to your capital. I have clients that email me excitedly to tell me they’ve won £125, but never get in touch when their other investments increase in value by thousands!
Short term cash savings – We often recommend a 12 or 24 month bond, which offers rates of 5-6%pa. This can be useful for putting money aside for the capital gains tax liability or for capital that you’re not ready to invest in the stock market for the longer term.
Pensions – if you’re still working after the sale, you can invest up to £40,000 (or up to your income if lower) every year and save 20-40% in income tax. It’s worth watching out for your lifetime allowance as an NHS pension of £46,657 a year is enough to take you over the £1,073,100 limit. The great advantage now with pensions, is that if you’re over 55 (maximum pension age is rising to 57 in April 2028) you can access the entire fund if necessary.
Individual Savings Accounts (ISAs) – you can invest up to £20,000 (£40,000 if you’re a couple) every tax year, and all the income and growth remains tax free. Many clients also take advantage of their children’s allowance provided they’re over 18. You can then withdraw as much as you like each month without paying any tax.
General Investment Accounts – these are investments in stocks and shares (also called unit trusts) but without the ISA wrapper. This means the dividends and any growth are liable to tax. We often start with these accounts and then transfer £20,000 into ISAs at the beginning of each tax year. You can also use your capital gains tax allowance of £12,300 every year, so if your funds have increased in value, you could save up to £2,460 in tax.
Investment Bonds – These accounts allow you to take an income of 5% a year (tax deferred). Basic rate tax-payers are not subject to any tax on the gain and higher rate taxpayers are only liable to 20% tax on any gain, if the investment is withdrawn.
Venture Capital Trusts – These are higher risk investments with a limit of £200,000 a year but offer a 30% relief on your income tax liability, provided you retain them for at least 5 years. We tend to only recommend these to clients that have a significant income tax liability and have already fully funded their ISAs and pensions.
Enterprise Investment Scheme – Also a higher risk investment but this option offers 30% income tax relief and also allows you to defer capital gains tax. These investments can help to reduce your inheritance tax liability. The investment needs to be held for at least 3 years.
Structuring an investment portfolio as above, and taking different levels of risk with each account, can provide you with an income in the short, medium and long-term, help you to maintain your standard of living and offset the effects of inflation.
It’s important to remember that you’re likely to want more income in the early part of your retirement, often before your pensions start and when you have the time and health to do the things you want.
Last but certainly not least – make sure you’ve written or recently updated your Will, so in the event you can’t gift or spend it all before you die, your hard-earned capital is left to the people you’d like to benefit from it.
If you’d like any advice, please contact team@wealthwide.co.uk or visit www.wealthwide.co.uk to find out more about how we help dentists.
The value of your investment can go down as well as up and you may not get back the full amount invested. When investing your capital is at risk.