Cheap borrowing rates make this a very good time for dentists to consider refinancing their practices. Apart from taking the opportunity to lock your business into low interest rates, you could also save on income tax while releasing funds for the further expansion of your practice – or for investment elsewhere, such as in your pension fund or property.
Refinancing also gives you the opportunity to 'recycle' your capital. An example or this is a dentist has been making profits of £100,000 per annum for the last five years, but has only drawn £90,000. This equates to a total increase in net worth of £50,000 over the period.
From the Inland Revenue's point of view, the business owes its owner £50,000. Technically speaking, he or she can withdraw that £50,000 at any time – but, in the real world, the funds are rarely available in liquid form.
However, the taxation rules allow the business to take out a loan of £50,000 in order to pay the owner the cash due.
The tax advantages are great as the whole of the loan can be offset against tax, so you effectively save 40% on the interest if you are a higher rate taxpayer. With the disappearance of MIRAS a few years ago this can be very attractive, since you can take out the business loan, with full tax relief, and make a lump sum reduction to your personal mortgage where there is no tax relief.