When a senior partner retires - and ‘really’ retires, rather than taking 24-hour retirement, there are plenty of things to think about.
Most retirement processes are entirely manageable if properly planned. The watchword is plan ahead so you know what to expect and involve the whole team including accountants, lawyers and bankers.
This guide covers the essential financial considerations in five steps.
1 Review the existing partnership agreement
Are there any contractual implications in it regarding retirement?
First and foremost consider whether you need advice from lawyers and/or the LMC on any contractual implications for the practice. This might be particularly relevant to PMS practices. Consider as well any appointments considered personal to Dr R for which the practice receives income. The answers to these questions will colour your thinking on everything else.
Ask your practice accountant to summarise the clauses and timescale that should be in the practice agreement that will help answer questions such as:
- What is the partnership capital and how is it to be valued (particularly premises)?
- Is interest payable?
- Who pays for valuation fees?
- What happens if the retirement date is not the normal accounts date?
- Can the practice make retentions for future liabilities, for example superannuation?
- How much are the continuing partners likely to have to repay and over what period?
Assuming everything is in order contractually you can move on.
2 Arrange a strategy meeting
A forthcoming retirement is certainly a good reason, indeed an ideal opportunity, for the continuing partners to look forward rather than backwards. Gathering the team together will at the very least help you map out the likely timeline of events and responsibilities. You could also use the meeting to consider whether now is a good time to make operational changes within the practice.
My previous article, a Q&A on business planning offers some useful tips on how to organise a business planning session. Here are some of the questions you should be asking when a partner is about to retire:
- Should we replace the retiring doctor?
- Can we afford to replace him/her?
- What is the best way of covering the work? A new partner or a salaried GP? Or should we do more work ourselves?
- Will the retiring doctor be prepared to do some locum sessions for us? (Do we want him/her to?)
Members of the Association of Independent Specialist Medical Accountants (AISMA) have access to national statistics that can help you benchmark your practice against others of similar size and structure in order to help you determine and cost out your answers to these questions.
3. Analyse premises funding
The most significant need for funding arises when the partnership owns the freehold on the premises. Here are the areas you will need to consider:
- Does the retiring doctor want to sell?
- Is the retiring doctor obliged to sell? Many practice agreements have ‘put and call option’ clauses that should allow the continuing partners to buy or the retiring partner to sell.
The retiring doctor will need to consider if he can qualify for Entrepreneurs’ Relief which means he only pays 10% Capital Gains Tax on any qualifying profits. If he sells within three years of fully retiring he should get Entrepreneurs’ Relief. But if he continues ownership, receives rent and sells later he may pay Capital Gains Tax at 28%. Dr R’s decision will influence how and when the practice buys him out. Assuming he wishes to sell immediately then a valuer will need to be appointed. Check the practice agreement to establish if both parties should agree on one valuer or if each party can appoint their own.
In most cases, a new partner is unlikely to be buying into the premises straightaway. The continuing partners will probably need to arrange a loan to fund the buy-out of Dr R’s share. A specialist medical accountant can help show the partners the cost of the loan compared with the additional cost rent they will receive. Although it maybe not imminent, consideration should be given to how and when a new partner will buy in. Not only will they take a share of the practice loan but they may also still have to raise a fair amount of equity.
Example of premises funding
Premises valuation £1,000,000
Existing loan (after buy-out) £600,000
Equity £400,000
An incoming partner buying a 20% share would need to find another £80,000 in equity. Depending on personal circumstances this could prove difficult – traditional lenders are now reluctant to fund separate equity loans unless these are also formally charged against the surgery premises.
Some practices therefore have a policy that the main loan should be kept as high as possible in order to limit the equity stake needed by an incoming partner. In this example they might therefore re-mortgage the existing loan to, say, £800,000 with the four existing partners drawing a further £50,000 each. Be aware that for tax relief purposes it is important to get these transactions in the correct sequence so do seek professional advice on this. The advantage is that the incoming partner only has £40,000 (20%x£200,000) of equity to find and this could be funded by restricting drawings over the first couple of years. Talk over your plans with your bank manager. Be sure that he or she sees what you are trying to achieve and endorses it.
If negative equity is an issue, is the retiring doctor still prepared to sell? Can he/she afford to? Presumably he/she considered this before he made his decision although it may only be known once the valuation comes out.
4 Understand leasehold considerations and limited company involvement
If instead the practice premises are rented under a leasehold agreement, arrangements will need to be made for the retiring doctor to be removed from his obligations under the lease. This then begs another question. Depending on the length of the lease and length of occupation, should the retiring doctor bear a share of any dilapidations? What are the terms of the lease and also the practice agreement? Better to reserve for it now than go cap in hand to the retiring doctor in a few years time.
There may be limited company involvement in the practice, for example a pharmacy or APMS or AQP contracts. If so the shares will need to be valued. Check the shareholders’ agreement to see if a formula has been pre-determined. Will the existing shareholders (the partners) buy the shares? It may be possible for the company to buy back (effectively cancel) the shares using the funds it holds. This can be very tax-efficient.
5 Draw up the final accounts
These will determine the capital repayments due. Normally the continuing partners will approve these first. The partnership accountants will want to ensure that all relevant income and expenditure for the period are reflected in the accounts - irrespective of when they were received or paid. The practice manager can help by making a list of income and costs that were received/paid after the accounts date.
If the retiring doctor was still paying NHS superannuation contributions up to retirement, there could be a future liability for the practice. This needs to be reserved against his/her capital balance in these accounts, on the understanding that an adjustment will take place for the actual figures in due course.
If the property valuations are agreed and funds in place, it is not always necessary to wait for the final practice accounts to be agreed before completing the property transactions.
By the time the accounts are prepared, one or more payments on account may have been made to the retiring doctor. It is therefore just a question of agreeing the balance and any interest due.
Anthony Brand is a partner at Haines Watts Chartered Accountants, Maidstone, a member of the Association of Independent Specialist Medical Accountants.
