Property issues part 2
Sale and leaseback of practice property
A GP partnership will own many assets including fixtures and fittings, medical equipment and sometimes the property that the practice works from. There are many advantages to this such as control over how the property is used and maintained and also if you are in the fortunate position of being in a building that grows in value, potentially receiving more for your investment when leaving the partnership than you paid when joining. However, the property can also tie up capital and if mortgages and loans are involved then monthly repayments can significantly affect cash flow. Sale and leaseback can be viewed as a way of releasing the capital and enabling the money to be utilised for other things such as personal mortgages and school fees. The property will be sold by the partnership to a third party who then immediately grants a lease back to the partnership. The use of the property will then continue under the lease arrangement with the third party often for a term of 20-25 years.
Advantages of sale and leaseback
New partners are potentially reluctant to buy into a property particularly at a time when they are starting out in their career and may have other personal liabilities such as buying their own home.
If there are existing partnership loans in place secured on the property any increase in borrowings either within the partnership or personally to buy in might be at different rates and new partners may not want to enter into such arrangements. There may be redemption penalties on the old loan arrangements that make shopping around for other competitive rates less viable. Therefore it may seem to be more attractive to an incoming partner to be part of a lease arrangement rather than purchasing a property. The main advantage for leasing premises is that the equity in the premises does not have to be funded by the partners.
Disadvantages of sale and leaseback
An incoming partner needs to be aware that all responsibilities of the partnership are jointly and severally liable, which means if they are taking on significant long term liabilities with respect to the lease and have no underlying property asset on which to secure those liabilities there is possibly a higher personal risk than if they were party to loan finance to own the building instead
When selling the property to the third party a capital gain (or loss) will crystallise. As the sale of the property is not classed as a cessation of the business then Entrepreneur’s Relief ( now known as Business Asset Disposal Relief) will not be available and capital gains will be due at the current CGT rate of 20% rather than the 10% reduced rate. If the property has increased in value since the partner purchased their share this may result in a significant amount of capital gains tax to pay.
Following leaseback, any subsequent growth in the value of the property is forgone by the partners and the third party will benefit from this.
Stamp duty land tax (SDLT) may be due on the lease and NHSE may not reimburse these costs.
The partnership will be reliant on the third party making or approving significant improvements to the property such as an extension.
The terms of the lease may also transfer the responsibility to the partnership for the repair and maintenance of the property on an ongoing basis and will no doubt include a closing dilapidations provision at the end of the lease term. NHSE are unlikely to reimburse the full amount of these costs and therefore the partnership will have to fund the difference.
Prior to sale to the third party the partnership may have benefitted from notional rent and other rental income from other businesses such as pharmacies. Once the property has been sold notional rent ceases and any third party income will be that of the landlord owner unless permission is given to sub-let rooms.
If you are considering the sale and leaseback of your property, we can help guide you through the maze of accounting and tax issues and can recommend solicitors to help with the legal aspects.