With increasing numbers of GPs leaving partnerships, and new partners difficult to recruit, the prospect of buying a colleague out of their share of the premises can be worrying for remaining partners. When a partner announces their intention to leave, they must discuss – and agree – with colleagues, how they will deal with the property.
Case study: The cost of buying out retiring partners
The GPs in a four-partner practice (where the surgery premises was owned equally by the four GPs) faced a scenario in which two partners gave notice to retire simultaneously, announcing that they both wanted to sell their shares in the property at their time of retirement. The remaining two partners feared that, if they couldn’t find replacement partners, they would need to take on an additional loan and would see a significant drop in their income, due to the cost of loan repayments.
The property was valued at £700,000 and the practice received notional rent of £60,000 per annum. Neither of the retiring GPs had a mortgage on their share of the premises, so had to be paid £175,000 each. The two younger GPs each had an outstanding mortgage of £150,000 and needed to take a further loan in order to buy out the retiring partners to the value of £350,000.
The notional rent is only intended to cover the mortgage interest; however as interest rates are so low, quite often the notional rent will cover the interest and the majority of the capital repayments. However, capital repayments are not allowable for tax, while notional rent is pensionable, so when looking at the cost of buying out exiting partners you must take into account the cost of the extra tax and superannuation on the notional rent income after mortgage interest.
In this example, the partners were able to negotiate a loan at an interest rate of 3.5% above the base rate of 0.5%. For an additional loan of £350,000 to buy out the retiring partners, annual loan repayments would equate to £22,000: £14,000 in interest and £8,000 in capital repayments. The remaining partners would have £30,000 of notional rent towards the interest and capital repayments so this would easily cover the cost of the repaying the loan. However, the partners would have to pay tax and superannuation on the notional rent income, less the mortgage interest. The net notional rent income for each partner on the additional share they have acquired will be £8,000; tax on this at 40% is £3,200; and superannuation (after tax relief) is £1,400.
For each partner the effect on their net take-home income after capital loan repayments, tax and superannuation will be a decrease of £600 per year. However, this is a very good deal given that capital is being repaid on the mortgage, so actual increase in equity in the first year will be £4,000!
If the cost of the loan had been more than the partners could afford, they could have considered taking an interest-only mortgage for a short period of time until they were able to recruit new partners prepared to buy into the premises.
Note that there is no stamp duty land tax (SDLT) payable on the transfer of the property in a partnership.
Tax on sale of surgery for retiring partners
When a retiring partner sells their share of the surgery premises they will need to pay Capital Gains Tax on the difference between the sale proceeds and the cost of the premises, including the cost of any improvements and legal fees.
The rate of Capital Gains Tax is 28%; however, if you are selling a business asset when you retire from the partnership you will be able to claim ‘entrepreneur’s relief’ which reduces the Capital Gains Tax to 10%.
Some retiring partners choose to continue to own their share of the premises and this will need to be agreed by the partnership. In this scenario you will continue to receive your share of notional rent. However if you decide to sell it, say, five years later, the Capital Gains Tax rate you will pay will be 28% as the premises are now considered to be an investment rather than a business asset. The reduced rate of 10% is only available if you sell the premises at the time you retire from the partnership as it is an asset that has been used in your business during the previous year.
It is advisable to draw up a lease between the remaining partners and ex-partners who still have a share in the surgery premises.
- Jenny Stone is a partner at specialist medical accountants Ramsay Brown & Partners