Whether a GP owns or rents premises, every partner should be familiar with the following eight taxes or costs arisng from a practice premises.
Income tax – rent or interest paid
Rent paid by the practice is an allowable expense for tax purposes, together with any related service charges. If your landlord charges you VAT on the rent and you are unable to recover any or all of this, the VAT element is also an allowable deduction.
Partners who own their own premises will get tax relief on any interest paid on loans taken out to purchase the premises, whether these are in the name of the partnership or are personal loans. Beware that no tax relief is available on the capital repayment element of any loans. This can cause problems where a GP expected his share of notional rent to cover his loan repayments.
Dr Cook receives £1,000 per month for his share of the notional rent. His monthly loan repayments are £950 per month, so he thinks he has £50 per month available to spend. However, his loan repayments comprise interest of £600 per month and capital of £350 per month, so in fact Dr Cook has a monthly cash deficit of £110, as shown below:
|Notional rent received||1,000|
|Interest on loan||(600)|
|Income tax at 40%||(160)|
|Cash deficit per month||(110)|
Income tax – rent received
Rent and service charges received from any tenants are subject to income tax. Any costs relating to the property ownership can be deducted in arriving at taxable income, so a reasonable proportion of property insurance, light and heat, interest or rent paid, should be allocated against property income.
Capital gains tax
Capital gains tax is payable on the increase in value realised by a partner from the date he or she purchased a share in the premises to when he sells his share. Any costs of enhancing the property during the period of ownership can be deducted. The length of time a GP has owned the property is irrelevant to calculating the gain.
If he or she sells his interest in the property on or within three years of retiring from the practice he will normally qualify for entrepreneur’s relief which means the rate of capital gains tax payable is 10%.
Dr Compton purchased a one-third share in the property in 1992 when it was worth £150,000.
In 1995 an extension was built at a cost to the partnership of £60,000.
In 2000 one of his partners left and Dr Compton purchased half of his share increasing his ownership in the property from one third to one half. The property was valued at £300,000 at this time.
He retired in 2012 and the property value has been agreed at £400,000. The capital gains tax payable will be £6,940 as shown below:
|Name of cost||£||£||£|
|Value of surgery on retirement||50% x £400,000||200,000|
|Purchase price in 1992||33.3% x £150,000||50,000|
|Cost of extension in 1995||33.3% x £60,000||20,000|
|Increased share purchased in 2000||16.7% x £300,000||50,000|
|Annual CGT exemption||(10,600)|
|Gain on which CGT payable||69,400|
|CGT payable at 10%||6,940|
The entrepreneur’s relief rate of 10% is only available if the disposal is linked to a partner selling his share in the business. This can catch out the unwary who assume the CGT rate will always be 10%. For example if a practice were to sell its premises to move into new leased premises, this is not the sale of the business but merely a change in location, and the normal capital gains rate of 28% would be payable.
If a partner dies inheritance tax needs to be considered. The value of the partner’s interest in the practice will form part of his or her estate, but 100% business property relief is normally available which reduces the value to £nil for inheritance tax purposes.
Business property relief is not available if a binding contract for sale exists at the time of death. HM Revenue & Customs views as a binding contract a clause commonly found in partnership deeds that states that continuing partners will purchase the interest of a retiring partner. This trap can be avoided with a partnership deed that gives partners an option to purchase and also give the executors an option to sell.
With a carefully worded partnership deed there is no binding contract, but as one side or the other will always want to transfer ownership the same end result is guaranteed.
National insurance is not payable on property income. If the property surplus is not properly separated from the rest of the professional profits, Class 4 NI will be paid in error on this element of the profit. If the partner’s share of profits exceeds £42,475 the Class 4 NI rate is only 2% so the difference is unlikely to be large. However if a partner’s share is less than £42,475, failure to separate out the property surplus would incur unnecessary NI at the rate of 9%.
For a practice that is not VAT-registered, VAT is just an additional cost on some expenses.
The VAT rules regarding land and property are complex. It is the landlord who decides whether or not to charge VAT on rent on a particular property, which is why some practices pay the tax and some do not. If the practice does pay VAT on the rent this should be taken into account by the PCT in setting the rent reimbursement. Practices should check that they are receiving the VAT-inclusive reimbursement.
For dispensing practices and any other practices that are VAT-registered they will be able to recover a proportion of any VAT charged on their rent when submitting their VAT return. In these circumstances the practice will need to liaise with the PCT each year to confirm how much of the VAT they have recovered in this way, so that they are only reimbursed by the PCT for the irrecoverable element of the VAT. PCTs vary in how they approach this, and there is the potential for a liability to be building up if this is not addressed regularly.
The Trott Medical Centre is a dispensing practice that is able to recover 45% of the VAT it incurs on its overheads. It pays rent of £20,000 + VAT per annum to its landlord, and for the past five years the PCT has been reimbursing the VAT-inclusive cost of £24,000. The PCT has now realised that it has been paying the practice too much and demands that the practice repays £9,000, which it has correctly calculated as follows:
|VAT on rent at 20%||4,000|
|VAT recovered by practice each year through VAT return||45%||1,800|
|Arrears due to the PCT for 5 years||9,000|
Stamp Duty Land Tax (SDLT)
SDLT is payable on commercial property transactions at the following rates:
|Value of transfer||Rate|
|£0 to £150,000||0%|
|£150,001 to £250,001||1%|
|£250,001 to £500,000||3%|
|£500,000 and over||4%|
A practice buying premises for £600,000 would need to budget for SDLT of £24,000 in addition to the purchase price.
Transfers of an interest in property within a partnership are usually exempt from SDLT. This is not always appreciated by property lawyers not used to partnership transactions and I have seen instances where a solicitor has suggested that an incoming partner paying £200,000 for a share in the partnership property also has to pay £2,000 SDLT.
What is less well known is that SDLT is payable when a new lease is taken out. The amount payable depends on the annual rent and term of the lease, but as an example the SDLT payable on a 21-year lease with an annual rent of £40,000 is £4,379.
As rates are just tax by another name, here is a cautionary tale to conclude.
A practice manager responded to a cold call from a property surveyor who offered to negotiate a reduction in the practice’s business rates with the local council. The surveyor was successful in reducing the annual business rates bill by £2,000 and the practice paid the 50% success fee to the surveyor knowing it was still £1,000 better off this year and £2,000 thereafter. The practice manager had forgotten that the business rates were reimbursed by the PCT, and so while it was the practice that paid the success fee it was the PCT that benefited from the lower rates.
Worse was to come the following year when the three-yearly review for the notional rent was due. While the partners were hoping for an increase, the district valuer was able to use the reduction in rateable value as evidence that the notional rent value should not rise.
Luke Bennett is a partner at Francis Clark LLP, a member of the Association of Independent Specialist Medical Accountants (AISMA).