Buying a share in the surgery premises – weighing the risks and the benefits

55% of primary care premises are owned by GPs! These arrangements can undoubtedly provide individual partners with a good nest egg for retirement – but equally can prove to be a headache if inadequate thought and attention is given to succession planning.

It is essential the ownership arrangements should be carefully documented, both in the partnership agreement (establishing the responsibilities of the owners and the occupiers respectively) and within a declaration of trust deed (governing the relationship between the owners themselves). As a partnership is not a separate legal entity in its own right, in most cases each owning partner will hold a fixed share in the equity in the surgery which (unlike his partnership share of profits) will not be variable. It is essential therefore that the property ownership is treated as completely distinct from the partnership.

A declaration of trust should also specify what is to happen to a partner’s share in the surgery upon retirement from the partnership. Many partnerships take the view that at the point of retirement, a partner should be obliged to sell his or her share in the surgery to the continuing partners, who in turn should be under an obligation to buy the share. It is common for a declaration of trust to provide for a grace period of perhaps 12 months from the date of retirement, during which the continuing partners can raise the necessary finance (including possibly arranging a new mortgage) to pay for the share.

Such arrangements ensure the surgery ownership is kept within the confines of the practising partnership. They also currently allow the retired partner to receive the benefit of Entrepreneur’s Relief from Capital Gains Tax (assuming ownership of the share passes within three years of retirement).

In cases where this does not occur, and the ownership of the surgery is thereby split between current and retired partners, it is not uncommon for tension to arise. This can be due to the fact that whilst some of the owners hold their shares as business assets, others view their shareholding purely as an investment. In such cases it is in the interests of both the owners and the occupying partners (whether they be owners or not) to put a lease in place. This not only secures the practice’s ongoing use of the surgery, but also frees up the ability of the owning partners to sell their investment “subject to the lease”, thereby maximising the return they will receive. Without a lease in place the investment is unlikely to be readily saleable, or only saleable at a significantly discounted value.

Unless proper arrangements are entered into, problems can arise with automatic buy-out arrangements if the practice in question has not given sufficient thought to succession planning. Take for example a scenario where the surgery is owned by three partners, and a new younger partner is brought in who buys a 25% share in the surgery. If the original three partners retire in relatively quick succession without replacement, the new partner could quickly find him or herself liable to finance the acquisition of first a 25% share, followed by a 33.33% share and finally the remaining 50% share in the surgery.

Whilst mortgage finance may be available based on the security of notional rent reimbursement under the practice’s NHS Contract, this does become increasingly tricky as partnership numbers diminish – and indeed many lenders will not lend to a sole contract holder given the risks if something were to happen to that individual. These risks can be managed with appropriate planning, but certainly partners should think carefully and take appropriate advice before buying into the surgery premises and entering into binding commitments to purchase further shares when other partners retire.

And if the practice is well run, and due attention is given to succession planning, these risks should hopefully be outweighed by the gains to be made as a result of investment in your own bricks and mortar!

Articles from the newsbrief: Five Year Forward View and integrated care; Super partnerships; Assignment of GP leases; To be in partnership or not to be in partnership; Who is an appropriate companion at an investigatory meeting; Why leaving that place in the sun may have become easier.

Click here to read the spring edition of Hempsons’ Practitioners Newsbrief in full.