Tackling tax for the future-ready medical practice

I think doctors may be more comfortable and more familiar with death, where most people don't like thinking or speaking about tax.

I remember we did an In conversation a few years ago where we spoke about intergenerational wealth planning - and from the research they found that tax and the lack of planning was the single biggest cause for the erosion of wealth.

We know the medical specialists and doctors are busy. People don't wake up on a Monday morning thinking about death or planning. Sometimes people plan when they're far along in their career and then it's difficult to structure wealth or to get the right insurance in place.

Prevention is the cure. You need to ensure your plan, your estate and your financial plan is not static, but it's something that changes and adapts as you, or your practice, or your family changes. 

The most important thing is that you should run your practice like a business, where you think about other ways to generate annuity income. Being a lawyer, we've got similar issues. We sell our time. We are our practice. So, think about different income streams.

Secondly, I previously mentioned that the single biggest cause for the erosion of wealth is a lack of planning and tax. Ensure that you get specialised advice. Get financial planners involved, get estate planners and collaborate with proper accountants. That's most important.

And then thirdly, diversify, save and protect. You should diversify into different asset classes. Your practice will start acquiring the property that you're practising out of. You'll get equipment. You must diversify from a personal perspective as well. Externalise some funds offshore, invest in different asset classes or acquire property locally.

You should speak to your financial planner to ensure you are diversified to a large extent. So, when you get into the phase of retirement, you are sufficiently covered from an annuity income perspective. 

We often tell doctors that there is no ‘one size fits all’. Each person and their situation will be unique.

Generally, we find that doctors will start running their practice in their own name, or in some sort of a partnership model, which means it's simple and cost effective. You pay tax at your marginal income tax rate. There are little costs involved and we know that it's effective to start out that way.

Then, once your practice starts building up and you start accumulating more revenue, then you could start looking at running your practice out of a company. We normally say that when you get to a certain revenue threshold it may make more sense to operate in a company. Why? Because the marginal tax rate of a company is lower than the maximum marginal tax rate of an individual. You may want to get tax advice tailored to you and your practice.

You also start acquiring more assets in the practice. You might buy the property you are practicing out of. There's equipment. There are supplements. There are books. Then a company starts making more sense.

Now, from a wealth perspective, once your practice is shooting out all the lights and you are starting to increase your revenue earnings, then you could start looking at vehicles like a trust company structure that will house your legacy wealth assets. All the assets that will accumulate wealth, this does not include your practice.

You want those assets to accumulate wealth outside of your estate, but you must also be sensible, because it can be quite costly.

So, our recommendation is to start off simply and then grow from there. 

We’ve often seen that a lack of specialist advice is probably the biggest reason why there's non-compliance, or they don't have the best planning in place or there's insurance issues or liquidity issues. You need specialist advice. I don't go to a heart surgeon if I need brain surgery.

As an example, at Investec, we've got Financial Advisers that will walk this journey with you. They can assist you with liquidity and retirement planning. And from there, you will go and speak to a specialist that will assist you to draft a will - because that's probably one of the most important documents that you will draft during your lifetime.

The first step is to contact a Financial Adviser. If you don't have one, you can contact your Private Banker or your wealth manager to put you in contact with one of our Investec Financial Advisers.

When it comes to tax compliance and being compliant, the key role player is the tax accountant.

When it comes to planning and creating your wealth and helping to make sure that you are insured from an insurance perspective, liability cover, protection income cover, buy and sells - all from an insurance perspective - your Financial Adviser is important. They will ensure that you are sufficiently covered from an insurance perspective, a liquidity perspective and a retirement perspective.

I think most people don't realise that we tend to start at the end - because people don't always realise that death is a liquidity event. Therefore, you need to be sufficiently covered in every stage of your life, whether it's in the beginning or closer to the end.

From a wealth management perspective, a wealth manager will start getting involved once you're more inclined to start planning from a legacy perspective.

So, if I had to compare all the role players... Your Financial Adviser starts out with you when your journey starts. When you're a young doctor starting your own practice, you need to ensure that you have a will, that you're sufficiently covered - from an income perspective, from a death perspective and from a liquidity perspective.

Once you've started your journey and your practice starts making more money - and you're ready to move over to the wealth creation part or the wealth preservation part - a wealth manager will be onboarded. They will ensure all your hard-earned money will be protected and invested, whether locally or abroad, for the benefit of your beneficiaries. We refer to this as legacy planning.

I think if you only ensure that you are liquid from an insurance perspective and a liquidity perspective - and you have a well-executable valid will - then that's a good start.

I think it's important for people to realise that your global estate plan, your will planning and your financial planning should not be static. It needs to change as your personal circumstances change. Planning is key.

Do you have beneficiaries that are moving abroad? Do you have family members moving abroad? Have you externalised assets? What are the implications of those changes on your global estate planning?

Simplicity is key. Your estate plan and your wealth plan should be simple. We often find that doctors will start out simple - it's cost effective and it makes sense as they're accumulating and growing their wealth. They will then adapt and grow as their practice grows.