Scandals put a dent in patients' trust in GPs
Dr John Couch argues that you cannot lose by buying in to practice premises
buying in to practice
Around half of UK GPs have a share in their practice premises. Although this number may have fallen a little in recent years, partly due to increasing numbers of private finance initiative (PFI) new-build projects and partly due to uncertainty among younger GPs, the economic and business arguments for self-ownership remain strong.
Those GPs who get the chance to buy in should seriously consider doing so.
There are three financial fundamentals that underpin ownership. The first of these is rent reimbursement. In effect the NHS pays a rent to owners of premises used for primary care. In most cases this is called 'notional rent'.
However, in cases where a partnership has built new premises in the last few years this may be paid as 'cost-rent'.
Briefly the latter allows for the extra costs of building such as architects' fees, and provides a fixed return based on interest rates at the time of building.
Once the value of notional rent overtakes this figure (on average this takes around seven years) a practice can switch over.
Notional rent is usually based on either equivalent surgery rents or office rents, depending on the location of the premises.
The level is set every three years after negotiations between the district valuer and a valuer appointed by the practice.
Under current rules the rent rarely falls, occasionally remains the same but usually rises. The amount of increase depends on local property rental markets.
It is the rent reimbursement that makes GP property ownership attractive (and attractive to PFI companies) and even from the outset any loan can cover most or all of the loan repayments.
In the current low interest rate climate, a GP actually pays very little net income towards property purchase. Indeed, as the rental income increases with time, most GPs actually make a net profit.
Next, loan interest is allowable as a business expense. This means most GPs receive a 40 per cent tax allowance on their interest payments. This sweetens the pill further.
Finally, as most GPs stay with the same practice for a whole career, increasing property values create an excellent retirement nest egg. For example a GP retiring now after 30 years in practice probably bought his or her premises share for around £12,000. The value now is at least £160,000.
Few other investments have achieved this growth. This level of increase may not be repeated but property prices usually do rise in the medium- to long-term.
Funding property purchase
Most GPs take out a loan repaid over around 20 years from one of the specialists in this market, of which the General Practice Finance Corporation (GPFC) and Royal Bank of Scotland are the most experienced. Loan rates around 0.5 per cent over base rate are usual. Generally accountants advise each GP to take out a personal loan rather than part of a partnership loan.
Some fixed-rate loans carry early redemption penalties, as a few unfortunate GPs have found to their cost. Take care to avoid these if you are looking at fixed rates.
In the past it was traditional to maximise the tax relief on interest by taking out an endowment mortgage. However, as endowment payoffs have suffered in recent years, most advisers now recommend a simple repayment loan.
Most lenders require a charge on the practice premises as security for the loan. This is usually straightforward but can be more complicated if partners have different lenders. Loans should be protected by life assurance and some may also opt for critical illness cover.
The rent review
To maximise the rent reimbursement it is vital to use a specialist valuer at the triennial rent reviews. The Royal Institute of Charted Surveyors can provide a list, but you should also ask other local practices and your accountant who they would recommend.
Negotiations often take many months and it may be necessary to appeal, but the final result is almost always worth the effort and cost. Once agreement is reached, the increase is backdated to the original review date.
Your practice agreement should contain a section referring to the property. Indeed, with increasing numbers of practices where only some of the partners own the premises, a separate property agreement is advisable.
The latter two points are critical as all partners buying or owning a property share must have the confidence that they can sell when they leave (if they wish). It is usual to have a 12-month buy-out period and to have a clause that allows for the property to be sold if the remaining partners are unwilling to buy.
All property should be well-maintained. It would be foolish for property owners to lose rental and capital value by failing to do this. Practices should set up a maintenance and redecoration budget.
They should also delegate a team member such as the practice manager to ensure the building remains a safe and pleasant place to work. It is sensible to also have an emergency fund for unexpected extra expenses such as a boiler replacement.
Improving, extending and rebuilding
Improvement grants are still available although funding has fallen. It is always worth discussing your plans for improving services to patients (whether directly or indirectly) with your PCT before you spend your own money. There may be conditions such as repayment if you sell your premises within a set time.
In order to reduce its capital expenditure the PFI has been opened up throughout the NHS sector. This has dramatically reduced direct funding to GPs for larger projects such as extensions and new-builds.
With most practices needing more space approximately every 10 years, this has created a huge bottleneck of projects.
Many practices have had little choice but to move into PFI premises, giving up property ownership, this being the only way to get better premises.
Refreshingly, a few entrepreneurial practices have bitten the bullet and funded new premises themselves, taking the attitude 'if PFI companies can do this and make a profit, so can we'. This is a large undertaking and does require a lot of financial courage. In many cases extra space is rented out to other primary care agencies, thus mitigating the cost and offering a route to reduce VAT on building costs.
Partners have responded to the recent lack of interest in buying-in among younger GPs by offering greater flexibility. Many take on larger property shares themselves. Also more retiring GPs are prepared to hold on to their property share. It is difficult to obtain a relatively safe return of around 7-8 per cent on capital from any other investment.
There is now renewed interest in partnerships. Partnership advertisements tend to offer ownership either as optional or negotiable. There is much sense in the historic system of delaying purchase. After two or three years it is much clearer whether a new partner fits in and wishes to stay.
Current salaried GPs are beginning to see partnership as more attractive than in recent years. It is very likely that they will also begin to recognise the financial attractions of ownership. Whether existing owners will now want to sell is another issue.
Practice mergers ('super-practices') are already being encouraged by the Government. This trend is likely to be boosted further by the threats posed by private providers moving in to primary care. The requirement for much larger premises will rise.
These threats will probably reduce overall premises ownership in coming years but for some groups of GPs it may act as a catalyst to make the quantum leap modelled by large accountancy firms. Corporate General Practice may be coming. It will be an interesting few years!
Essential areas that must be covered in separate property agreement
·Who owns the premises and in what proportions?
·How will the property be valued?
·Who is responsible for external and major internal repairs? (usually the owners)
·Who is responsible for internal maintenance and internal/external redecoration?
(usually the partnership)
·Is property ownership a prerequisite of partnership, voluntary, or something that may be offered
at a future date?
·If an incoming partner is expected to buy in, when is the deadline?
·Can an outgoing partner hold on to their property share if they wish and the partnership agrees? (this should include clear conditions)
·At what stage should the remaining partners buy an outgoing partner's share?
·What happens if remaining partners are unable or unwilling to do this?
Key points on insurance
Adequate insurance is vital and will also be a condition of property purchase loans. Cover usually includes the following:
·Building cover Usually for the cost of rebuilding. Check cover for subsidence, flooding and terrorism carefully an extra premium may be required.
·Contents cover Check annually that you have adequate cover. A room-to-room assessment is the only way to assess this. Ensure you have a new-for-old policy. Once again check flooding cover.
·Employer's third party liability
Usually part of the same policy.
·Cover for Inland Revenue tax investigation This is a useful extra as such investigations can be very costly.
It is worth shopping around for quotes
but choice is fairly limited in this market.
Use specialist medical insurers.
Ensure retrospective cover for subsidence
if you are changing insurers.
John Couch is a GP in Ashford, Middlesex