you have an large tax bill on retirement?
I am planning to retire from my partnership
on 31st March 2006. Our partnership prepares the accounts
to 30th June each year and I have heard something about
overlap profits, which may mean I will have a large tax
bill after I leave. I am unsure how this will affect me?
If you have an accounting year end which does
not coincide with the tax year, then depending on when you
retire from the partnership this could result in a large
tax bill, this is due to the way profits are taxed in the
year you retire.
As your partnership prepares accounts to 30th
June, in the tax year 2005/06 you will be taxed on your
share of profits for the year ended 30th June 2005 and your
share of profits from 1st July 2005 to 31st March 2006 i.e.
you will pay tax on 21 months of profits in 2005/06.
The tax rules state that you can not be taxed
on more than twelve months’ profits in one tax year.
To reduce your profits from 21 months to 12 months you would
deduct your overlap profits, which would be equivalent to
9 months profits. (see Table A). However, the problem with
overlap profits is that they are likely to be based on profits
from earlier years, which would be much lower than the profits
you will earn in 2005/06.
Overlap profits either arose in 1996/97 when
self-assessment was introduced or on joining a partnership.
These are profits that have been taxed twice and therefore
are deducted on leaving a partnership or change of accounting
Your accounts for the year ended 30th June
2005 have already been prepared, so we can estimate your
potential tax liability which would become payable in January
2007 (see Table A)
The accounts for the year ended 30th June
2005 show your individual profits of £139,000. It
is estimated that your share of profits from 1st July 2005
to 31st March 2006 will be in the region of £120,000.
This gives total profits for 21 months of £259,000.
Your overlap profits are £40,000, this is equivalent
to nine months profits earned in 1996/97.
After your £40,000 deduction of overlap
profits, your taxable profits in 2005/06 will be £219,000
this represents profits for 12 months. However, the problem
is that your nine months profits from 1st July 2005 to 31st
March 2006 are estimated to be £120,000 compared to
the equivalent nine months overlap profits of £40,000
which arose in 1996/97, this means you have tax to pay on
the additional £80,000 in 2005/06.
As a result you would have a potential balance
of tax for 2005/06 of £38,000 due in January 2007..
On this date you would also be required to make a payment
on account for the next tax year, 2006/07 of £42,000
giving a total tax payment due by 31st January 2007 of £80,000.
However, if you are only going to be receiving
your pension in 2006/07, your accountant can apply to reduce
your payments on account for 2006/07, as these are based
on your earning self employed income of £219,000.
||Tax year 2005/06
||Equivalent no of months
Profits – ye 30.06.05
Profits – to 313.03.06
Total tax due on profits
1st Payment on a/c 2005/06
2nd Payment on a/c 2005/06
Balance 2005/06 due January 2007
With the introduction of the new GMS contract, practices
are already seeing large increases in profits, which are
expected to continue in 2005/06. GPs planning to retire
whose accounting year end does not coincide with the tax
year, should ensure they seek advice from their accountant
as to their potential tax liabilities. If GPs are unaware
of the rules regarding the final taxation of profits, a
large tax bill may come as a nasty shock, especially if
they are only receiving a pension.
GPs could consider going part time before
they retire so that their final profits on retirement from
the partnership would be reduced and after deduction of
overlap profits may not leave a large amount of profits
to be taxed.
A final thought, for GPs considering retiring,
is that it may be advisable to wait until after 31st March
2006, to gain the maximum pension benefit under the new