When talking about an incoming partner 'buying into' a practice, it is important to establish what it is exactly that the incoming partner is paying for.
Under the NHS regulations it is forbidden for goodwill to be created in a practice which holds a GMS or PMS contract; so an incoming partner is not paying for goodwill or 'equity' in the partnership 'business'; even though such a partner is often referred to as an 'equity' partner.
If the partnership owns the surgery premises an incoming partner may or may not be asked to 'buy into' the surgery as a condition of joining.
It is important to distinguish this acquisition of a share in the premises, a specific partnership asset, from that of the practice business as a whole in which it is not possible to buy a share.
The property is a capital asset used within the business and the partner may be liable for capital gains tax (CGT) when disposing of their share if the property has gone up in value.
Typically, when a partner buys into an existing surgery building this will involve one or more of the other partners disposing of some of their share in the property and this could potentially have CGT implications for the partners selling.
Capital sharing ratio
The capital sharing ratio (how a partnership divides the equity in a property among the partners) usually, but does not have to, follow the partners' profit sharing ratio. However this will not be the case where not all of the partners own the building.
It is usual to delay the new partner's purchase of a surgery share until it is clear that they will stay. In some practices this is delayed until the partner achieves a parity profit share. The so-called 'capital' account in the partnership accounts shows how much equity each partner has in the building.
New partners are often expected to put money into the business as 'working capital' to help meet the running costs. This amount can either be shown as a separate capital account in the partnership accounts (separate to the property capital account), or part of the partners' 'current' account.
Whichever heading it falls into, there are no tax implications for repayment of this money when the partner eventually leaves as it is in effect merely repayment of a loan used to fund working capital and not to acquire an asset.
If a new partner has to borrow the money to buy in, income tax relief on the interest paid on the loan is available if the transaction is properly structured. Your accountant can advise.
- Simon Gray is a partner in specialist medical accountants, Henton & Co LLP