Eight key questions that will help you make the most of your premises
Accountant Nick Stevenson summarises what property-leasing and -owning GPs need to know about the financial aspects of premises management
Many practices need to invest money in their premises in order to comply with CQC standards, so now is a good time for GPs to take stock of all the financial considerations involved in being a property-owning partner.
There are many issues to examine, especially for potential new partners who need to decide if they want to buy into the practice. Understanding all the implications will help everyone plan accordingly and the following eight questions will help you make the most of significant financial asset (and expense) in your partnership.
So what does the future hold for premises funding? Austerity rules in the wider economy and NHS finances are under particular pressure. While there is no mention of any change to the status quo, there can be no cast iron assurances that the current system can be maintained. Property-owning GPs need to be aware of the potential investment risks and keep a close eye on moves to change the premises funding rules.
Will the value of the surgery premises alter over the coming years? For older surgery premises the key question is will the premises be fit for purpose in the new NHS? CQC standards may force practices to move into purpose-built health centres or spend considerable sums on upgrades and refurbishments, funded by the property-owning partners. With increased competition from new providers in modern purpose-built buildings this may force the hands of practices to relocate and upgrade. Any of these issues could force down the value of your surgery investment and add to the risks involved.
1. Are you renting out rooms as regularly as you can?
Premises costs are probably the second biggest expense for a practice after staff costs and these costs are mainly fixed and not subject to variable usage factors. It is therefore essential that the property is put to full use and as much income extracted from it as possible. This will entail a detailed analysis of how rooms and space are utilised. Consider these areas:
- Are rooms being used for non-clinical work that could be turned into consulting rooms?
- Are free rooms rented out to alternative users for a fee? There may be space for a pharmacy, dentist, or other healthcare service.
- Can the practice be used out-of-hours at weekends or evenings?
2. Have you noticed the new expenses in the GMC premises cost directions for 2013?
When there is no property ownership available for a practice because the building belongs to a third party investor or is an NHS-run health centre, there are still property issues to consider. The risk shifts to the liability associated with signing a lease agreement. This effectively ties the practice into a liability that must be paid for the length of that lease. While rent reimbursement will normally match the lease costs and increase every three years with the rent review process, there is no guarantee that this will continue.
The newly published GMS Premises Cost Directions 2013 require practices to demonstrate appropriate negotiation of rental agreements to obtain reimbursements. This will result in the costs of specialist valuers’ fees being an additional expense for practices.
3. Is owning the practice premises a good investment opportunity?
On the face of it, property ownership today involves the same decisions as it has in the past. Buying a share of the practice property appears to make sense as an investment decision. Banks are still willing to lend to partners wanting to buy a share of their surgery premises and in the majority of cases the rent reimbursement received will more than cover the interest costs on borrowings. Over a period of time the surplus income will help to pay off the capital borrowed and assuming the value is maintained, equity will grow.
But with any investment decision there are inherent risks and these need to be considered carefully. Will the value of the premises be the same or greater when the time comes to dispose of your share? If the value falls then the amount of equity built up will be less and you may even be in a position of negative equity. What will happen in this scenario? Selling at a reduced value would result in a capital loss for the partner together with the need to make up the difference between the sale proceeds and the bank borrowings. More worrying is whether or not the remaining GPs can find another partner willing to buy in.
4. Will you sell your share when you retire?
In the normal course of events a new partner joining the practice when a partner retires would enter into a simple transaction to transfer ownership between the two at an agreed valuation. Today, however incoming partners do not always wish to buy in. This may be because the value is too high, or because they already have substantial debts to service in the form of student loans, personal mortgages, car loans and credit card debts.
With no one willing to take over the debt, the partnership may therefore decide to take on salaried GPs or reduce doctor time.
Check the practice agreement first. There may be a clause stating that on-going partners need to take over an additional share. The ultimate position may be that retired partners retain ownership and they simply become the landlords receiving rental income from the practice.
5. Are you paying the right rates of income tax and capital gains tax?
Property owning partners receive a share of any notional rent less associated costs of finance as a prior share in the overall partnership profit allocations. This is subject to income tax and Class 4 National Insurance in the same way as all other partnership profits.
However, when a partner leaves the practice and retains their share, even for a short period of time, the rental income becomes just that for the partner and should be treated as a profit or loss from land and buildings on the tax return. Income tax is payable on the profit but no National Insurance. For the partnership there is now a rental charge to show in the accounts as the partner has become a third party landlord. Total profits will therefore be reduced, although each individual’s share of profits should not be affected.
Care needs to be taken from a Capital Gains Tax perspective. Provided the property is a partnership asset it will be classed as a trading asset and will therefore entitle retiring partners to receive Entrepreneur’s Relief on the gain. This effectively reduces the percentage of tax charged to a rate of 10%. This will apply provided that the property is disposed of as part of the retirement from the practice and is actually sold within three years of leaving. After this period of time the asset becomes an investment asset and Entrepreneur’s Relief is lost.
6. Have you remembered to pay Stamp Duty Land Tax (SDLT) and VAT?
SDLT is often overlooked as a tax charge. It applies on any purchase of premises except for transactions that form part of the purchase of an interest in a partnership. Generally speaking no charge will arise if the owners of the building are the same as the partners in the business. Legal advice should be sought to confirm this, particularly where there is a third party investor since charges may then be applicable.
GPs do not usually have to deal with VAT. Since their income is subject to a medical exemption they do not have to charge VAT on their services. Premises are often opted into the VAT scheme so that costs can be reclaimed on the build and in these circumstances VAT has to be charged by the owners on any rent charged to tenants. GPs developing their own premises should seek specialist advice on when VAT may apply.
7. Could an alternative business model work for you?
For some practices there are compelling reasons for considering different business models for premises ownership. The size and specification for practice developments is becoming more complex as federations and groups of practices share the same space.
While traditional partnership models remain the most common form of ownership, property companies are now being used as an alternative model. This can provide some tax savings in terms of corporation tax rates versus higher income tax rates on profits. Care needs to be exercised though in respect of other taxes such as CGT, where Entrepreneur’s Relief may not be available, and VAT.
Owning shares in a property investment company can provide a route to succession planning as transferring shares may be more straightforward than constant changes to ownership in a partnership where bank, land registry and legal documents will all need updating. However extracting surplus funds and any surplus on disposal can lead to double tax charges and there might also be superannuation implications to consider. Seek advice from a specialist medical accountant.
8. Are you getting the best lending rates out of your bank?
Banks are still very happy to lend to GPs and see the healthcare market as a good and secure sector. The problem now though is that the borrowing rates are very much more expensive than they have been historically. Rates of 1% over base are no longer being offered and care needs to be taken in assessing the total cost to establish whether the rent received will cover costs and offer the sound investment opportunity that premises ownership has represented in the past.
Remortgaging or refinancing has often been used by GPs to withdraw built up capital or equity prior to ultimate disposal and this can be done in a very tax efficient manner provided the correct steps and processes are followed. Increasing debt on a business asset to reduce personal debt has the advantage that the interest on the business debt is tax allowable and so may prove to be cheaper. However, care should be taken in assessing all of the costs involved. Today it is often the case that arrangement fees and higher interest rates on business loans can offset any tax benefit.
Nick Stevenson is a Healthcare Services Partner at Moore and Smalley, a member of the Association of Independent Specialist Medical Accountants (AISMA).