Buying into premises is still a good deal
Young doctors are often worried about buying into a practice, but Dr Stephen Gardiner argues that it is not the burden they often fear it is
are often worried about buying into
a practice, but
Dr Stephen Gardiner argues that it is not the burden they
often fear it is
One of the major concerns for doctors who are thinking of joining a partnership is the purchase of a share of premises. The prospect can seem daunting for a young doctor who is often saddled with a mortgage and the expense of a growing family. In the future newly qualified GPs may also still be repaying their student loan and tuition fees. So what advice should they be offered?
Will they be tying themselves down for life and taking on an ever-growing debt or will they be making a profitable investment with few if any strings attached, an investment that they should grasp with both hands?
Most are surprised to find the answer is usually to grasp the opportunity. Banks and other lenders will readily provide the cash to allow doctors to buy into practice premises, and private finance companies are itching to buy up practice premises and lease them back to partnerships.
The reason for this is that the income source to repay the loans is guaranteed and, in the vast majority of situations, the return on any investment is far greater than can be obtained elsewhere for a very low risk.
Practices that own their own premises are refunded their property costs either through notional rent or cost-rent payment schemes. The cost-rent scheme is nowadays cash-limited as it forms part of the PCO budget, but previously it was open-ended and offered generous payments that covered the full repayment of building costs satisfying defined criteria.
Notional rent is an amount set by the local district valuer who takes into account local property prices and the number of GPs working in the practice.
GMS2 now allows an 'enhanced notional rate payment' to be made in addition to cost-rent payments where practices have been updated. It also offers a minimum sale price guarantee for practices moving to new premises that can help with the disposal of properties that might otherwise prove difficult to sell.
Doctors joining a practice may have to take out a loan to buy their share of the property but in return they will receive a proportion of the reimbursement that the practice gets from the PCO, which can be used to finance the loan repayments. Add to this the tax relief at 40 per cent that doctors earning above the higher rate tax threshold (£31,400 for 2004/5) receive on interest payments of any business loans, plus the rising prices of property, and it is becomes clear that buying a share of practice premises is usually an excellent investment.
There are of course times where a practice has decided to build to a higher specification and total costs are not fully covered by reimbursements. In this situation a clear business plan should be available to justify the spending and to demonstrate the point at which property costs become profitable.
However, it is possible, even in these circumstances, to protect doctors who wish to avoid being tied to a practice by stipulating in the partnership agreement that a retiring doctor is paid their property share either at valuation or cost, whichever is higher.
The key to protecting partners from financial risk is of course the partnership agreement. This should clearly state that partners will receive their agreed share of all income received by the practice and that, in the event of a partner leaving, the remaining partners will purchase that partner's share of the practice, including their property share.
This gives partners the freedom to leave a practice, repay any outstanding loan and be free to move to a new practice if they so desire.
Before joining a partnership, therefore, it is always sensible to get professional advice about the practice accounts and to have your solicitor scrutinise the partnership agreement. But the fears of growing debt and being tied down are in most cases just an illusion.
lBanks are keen to lend cash for practice premises as low-risk investment with guaranteed income source to repay loans
lPremises-owning practices are refunded through notional rent or cost-rent payment schemes – use your share of reimbursement to service loan repayments
lThese are added benefits under GMS2 – 'enhanced notional rate payment' and 'minimum sale price guarantee'
lTax relief at 40 per cent for doctors earning above the higher rate tax threshold
(£31,400 – 2004/5) is available on interest payments of any business loans
lProperty prices are rising
lThe partnership agreement should protect you from financial risk and make it possible to switch practices without being out of pocket
But one warning
lTotal costs may not be fully covered by reimbursements if the practice is built to higher specification
Stephen Gardiner is a GP in Bridgwater, Somerset