Is it a good idea to incorporate your GP surgery premises?

I have written elsewhere about the legal side of moving GMS or PMS practices into limited companies - and the conclusion is that for most practices, it's still not worth doing as things stand currently. But what about just incorporating the surgery premises, ie, moving the premises into the ownership of a company, which is itself owned by the partners? That could give the benefit of limited liability, and could have tax advantages.

Sebastian Beard, Simpkins Edwards (the accountant's perspective):

Some of our clients already hold their surgery premises in a limited company, and more are considering transferring either their surgery or pharmacy property into one. This can have significant tax consequences, so it is important to plan carefully before any transfer takes place.

The main points to consider are set out below:

• Tax on property profits.
  
  If the surgery premises are owned through the partnership, each property-owning partner pays Income Tax and National Insurance Contributions on their share of the property profit as it arises.
  
  Broadly, this profit is the notional rent received, less allowable finance costs. Depending on the partner’s overall income, the tax cost can be as high as 62%. It may also affect valuable benefits such as Tax-Free Childcare or create pension Annual Allowance tax charges. If the property is held in a limited company, the company pays Corporation Tax instead. The rate is much lower, 19%-26.5%, which leaves a greater share of post-tax income. The improved cash flow makes it easier to repay the property loan and gives the partners more control over when they take money personally. 
• Stamp Duty Land Tax when the property is transferred.
  
  Transferring a property from a partnership to a limited company can trigger Stamp Duty Land Tax (SDLT). The amount depends on the property value, any debt and the ownership arrangements. In some circumstances, special partnership rules can reduce or remove the charge, but only if the conditions are met. These rules are complex, so careful planning is required both before and after the transfer.
• Capital Gains Tax for the partners.
  
  A partner may have to pay Capital Gains Tax (CGT) when some or all of their interest in the surgery premises is transferred. The taxable gain is broadly based on the increase in value since that partner acquired their interest, after allowing for relevant costs and any available reliefs. The amount will therefore differ between partners. Moving the property into a company can bring forward a tax charge that might otherwise have arisen later, for example when a partner retires or reduces their interest. This is usually one of the main tax disadvantages of a limited company structure, although paying tax sooner could prove beneficial if CGT rates rise in the future.
• Stamp Duty when share ownership changes later.
  
  A common arrangement is for the partnership to own the shares in the property company. When partners join, leave, or change their working commitment, the underlying ownership of those shares may also need to change. This can create a Stamp Duty charge. However, special rules may again eliminate this charge. The structure should therefore be designed carefully at the outset and reviewed whenever the partners’ interests change.
• Taking money out of the company.
  
  As the company may pay less tax on its profits than the partners would pay personally, cash and retained profits can build up in the company. This may increase the value of the partnership’s investment in the company. That can benefit existing partners, particularly where future growth in value is taxed under the CGT rules rather than as income, but it can also make the cost of joining the partnership higher for new partners. Some partnerships help incoming partners by providing loans, but this does not remove the need to manage the growing value of the company. The partners should therefore agree how and when surplus cash or profits will be taken out, taking account of the company’s cash needs and loan repayments. There may be tax-efficient ways to do this, but the right approach will depend on the circumstances.
• When would I recommend transferring a property to a limited company?
  
  We all understand that each practice is different and it is vital to understand the individual and collective circumstances of all partners. However, the hallmarks of a partnership where this sort of planning is appropriate are often as follows:

1. Profits that fluctuate each year so that tax liabilities are difficult to manage.
2. Notional rent exceeds loan interest.
3. Partners are earning close to the £100,000 threshold for Tax-Free Childcare and need to carefully manage their taxable income.
4. Partners have taxable income of between £100,000-£125,000 and are suffering high marginal rates of tax due to the loss of the personal allowance.
5. Property loans on a repayment basis that are causing cash flow challenges or over restricting partner drawings.
6. Partners with an appetite to access tax-efficient benefits such as electric cars.

Oliver Pool (the solicitor's perspective):

The process of transferring the premises into the company is not, however, a simple one. It comes with costs attached, and creates certain complications for the future:

• The company has to be incorporated. A shareholders agreement will be needed - which does much the same job as the partnership deed. This comes with a price tag attached, and of course there are also ongoing costs to consider such as statutory admin which needs to be filed each year (and unlike with partnerships, there are fines for failing to do this) plus of course the fact the property accounts become available to the public.
• The legal title to the premises will have to be transferred to the company, even if there is no change in person.
• Assuming there is already a mortgage in the name of the partnership, there will have to be a refinance. The bank may offer the same terms (LTV and interest rate) as it does to the partnership - but it also may not do. You may need to factor in early redemption charges on your existing partnership borrowing. There will also be costs to the bank - which will be passed on to the borrower - in instructing lawyers to deal with the due diligence and refinance. The bank's requirements as to security arrangements might include a combination of freehold mortgage, debenture, directors' guarantees, leasehold mortgage and potentially other security as well.
• The transfer will in most cases trigger a stamp duty land tax (SDLT) charge, payable by the company itself. On any future share transfers between the partners, additional stamp duty will be paid. If the premises remains in the partnership, transfers between partners are free of SDLT but in this context (ie, retired partners selling out) stamp duty of 0.5% is chargeable.
• In most cases, a lease must be entered into, with the company as landlord and the medical partnership as tenant. Banks often insist upon this, and it recommended even if the bank does not require it. The lease has to be approved (by the ICB/NHSE in England, or the Local Health Board in Wales) before rent reimbursement can be paid, and this tends to take several months, which could hold up the entire transfer into the company. Upon grant of the lease, SDLT is payable by the partnership on the lease itself, additional to the SDLT charge incurred by the company for the property transfer (although sale and leaseback relief may apply if certain criteria are met).

The legal costs are likely to be upwards of £25K, and while this is not fatal to the project, it does demonstrate that the tax savings have to be significant before it becomes worthwhile.

Paying off mortgage

As the mortgage loan is paid off by the company over time, equity builds up, so the partners' shares become more valuable. When new partners join, they are therefore faced with a large bill to buy in. When the premises sits in the partnership, it is simple enough to increase the partnership loan to cover the new partner's buy in. However this trick is no longer available where the borrower is the company. This is because the new partner isn't buying a share of the premises (which he or she can use as security for the loan), instead the new partner is buying a share in the company. Banks are generally reluctant to treat security over shares in the way they treat security over premises. Unless the Company is in a position to refinance its total borrowing, which in itself raises a host of issues, this leaves new partners having to raise personal funds to buy in - and quite often new partners are at a stage in their lives where this is simply not possible.

Further complications

Once the premises sits in a separate company, it is much easier for the partnership and the property owners to diverge over time, either intentionally or by default. New partners may join and not buy in, for whatever reason but are still expected to take on the responsibilities of tenant under the Lease. Other partners may retire from the partnership, but remain owners of the company. This may not be intended at the time, but one does see it happen, and it tends to create a two-tier partnership, with haves and have-nots. The "haves" enjoy the benefit of the rent reimbursement, with their share of the mortgage gradually being paid off for them. The have-nots don’t get any of that but have the lease responsibilities. That can cause tensions within the partnership which can be the start of wider disputes. These things won't be an issue on Day 1 of the incorporation - but they may emerge over time.

Relief from personal liability?

One key appeal of incorporating the premises is that in theory it limits the partners' liability. The mortgage loan is in the name of the company, not of the partners. The bank can only proceed against the company for repayment, not the partners' personal assets. Being relieved of the practice's key liability is an attractive idea.

The problem is that it is less attractive for the bank. A key reason why banks are willing to lend to GPs with high LTVs and relatively low rates, is that each partner is personally entitled to receive the notional rent. This is no longer the case if the borrowing is held by a company, which does not itself hold a GMS or PMS contract. Accordingly, the bank will either offer less attractive terms OR it will require the partners to give personal guarantees (PGs). If the latter is the case, then the partners are back at square one, having failed to avoid personal liability, but still incurred all the other downsides discussed in this article.

As a side note, we have seen cases where the bank suggests at the start of the process that PGs are not required, but then later in the process when a different department looks at the deal, they insist that PGs be entered into after all - so one has to proceed with caution even if the bank says it will not want PGs. We understand that at least one bank is not asking for PGs at this stage, but unless that becomes a wider practice then it will seriously limit the partners' ability to be able to refinance to different banks.

The partners also remain personally liable under the Lease obligations as Tenant and the lease term tends to reflect the term of the mortgage loan and can be long term. Liabilities will include payment of the rent (albeit, rent which is reimbursed by the NHS) and repair responsibilities (which most likely won't be reimbursed).