Many independent pharmacy owners will still be exposed to a substantial inheritance tax bill

Mukesh Lad, chairman of the LIPCO federated group, explains the inheritance tax implications of selling your business

I’m going to pick up the thread from last month when I discussed the implications of the Chancellor’s July Budget on independent pharmacy business with my finance director Manish Patel. As an accountant with 25 years’ experience, advising clients on business and tax strategy, he pointed out another major financial risk that many independent pharmacy owners are unaware of and are very likely to face. It’s called Inheritance Tax.

Manish has a thorough understanding of company, trust and tax law. He was instrumental in the development of our award-winning Leicestershire independent pharmacy federation that now has over 60 members and has secured upwards of £0.5m in healthcare contracts. As an accountant living and breathing independent pharmacy, Manish has a unique insight in to why independent pharmacy owners may find themselves unexpectedly exposed to a significant inheritance tax hit.

In July, the Chancellor introduced his new ‘family home allowance’ inheritance tax exemption of £100,000. This comes into effect in April 2017 and the allowance increases to £175,000 by April 2020. It’s applicable to a taxpayer’s main home only and is in addition to the existing £325,000 inheritance tax exemption. Nevertheless, many independent pharmacy owners will still be exposed to a substantial inheritance tax bill. Why, I hear you ask …

The golden years

Unlike today, pharmacists who qualified in the 1980s and early 1990s were able to open or acquire a pharmacy business reasonably easily. Most did just that. There were no restrictions on opening a pharmacy until 1987 and goodwill levels remained low until 1997 when New Labour started to inject vast sums of money into the NHS. Pharmacy fee incomes rose substantially after 1997 and with them pharmacy goodwill levels soared from around £100-200k to as much as £1m. Manish remembers several of his independent pharmacy clients accumulating hundreds of thousands of pounds surplus cash in their business deposit accounts. Those were the days!

Unfortunately, the 2008 financial crash followed by the 2010 austerity coalition government brought those golden years to an abrupt end. And the so-called ‘top down’ NHS reorganisation brought with it new regulations and responsibilities increasing uncertainty in our sector just when pharmacy fees were being cut and goodwill started to stagnate.

Today these pharmacists are 50 to 60 years old. As business owners, many will have seen their pharmacy goodwill rise significantly over the past few decades, making it virtually impossible for our new generation of pharmacists to afford to buy. However, the combination of middle age, high goodwill and rapidly changing regulations feeding market uncertainty will force many to seriously contemplate the sale of their pharmacy business sooner rather than later. This would allow them to retire comfortably on their large goodwill nest egg. The appeal of working as a locum without the headache of running an increasingly regulated pharmacy business is all too evident.

However, if you are thinking about retiring, think again! This is precisely the point where a serious financial threat takes over. The very act of selling your pharmacy business will immediately convert the goodwill that is free of inheritance tax into an amount of cash that will be fully liable to inheritance tax at 40 per cent. Let me give you an example …

Case studies

Mr P is 55 and owns a pharmacy business valued at £1m. In addition he has personal and non-business wealth of a further £1m, taking the value of his total estate to £2m. Therefore on his death Mr P’s liability to inheritance tax on his £2m estate would currently be £270,000 (£1m – £325k x 40%). But after April 2020, when the full family home allowance of £175,000 kicks in, it would be reduced to £200,000. The corresponding figures if Mr P were married would be £140,000 and nil (because the inheritance tax exemption allowance would apply to both husband and wife, ie, be doubled).

But if Mr P decides to retire and sells his pharmacy business for £1m prior to his death, his estate will still be around £2m. However, now his inheritance tax bill will have jumped to £670,000 (£2m - £325k x 40%) – a tax hike of £400,000. After April 2020 it would be reduced to £600,000. If Mr P were married the corresponding figures would be £540,000 and £400,000. This tax must be paid to HMRC in January following the tax year of his death (or, if married, on the death of his spouse).

I was shocked when Manish explained this to me! And no doubt many of you will be completely unaware that your family could be facing this huge tax bill a year after your death. The time to act is now. You need to put careful long-term plans into place to mitigate this tax hit. But be careful, most advisors will offer some form of life insurance or a clever tax scheme as possible solutions. They can work, but it’s not for everyone and they carry risks of not working when you need them most.

Listening to Manish it seems the smart thing to do is to die first and then sell your pharmacy. Sounds silly, but it is not altogether impossible!

So if you are still thinking about retiring, think again. And on this occasion, forget about the pennies and focus on protecting your hard earn pounds!