Practice property loans – implications of rising interest rates

GPs that borrow to invest in their practice premises are likely to be in a similar situation to homeowners where a fixed interest period on their loan is coming to an end – refinancing the loan at current interest rates will see significant increases in the net costs. 

In our experience, most GP practices have opted for the ‘notional rent’ reimbursement approach from the NHS rather than the ‘borrowing costs reimbursement’ option: in the long run the notional rent approach is likely to be beneficial as it is not dependent on borrowing so continues after initial borrowing has been repaid. 

Although practices notional rent payments do change over time, this is based on the value of the premises which is only updated on a three yearly basis. Therefore, while GPs receive their proportionate share of notional rents, these are unlikely to increase as rapidly as borrowing cost have in the last 12 months. So where the time for refinancing has arrived, increased borrowing costs are likely to reduce partners net profits in future years.

Impact on joiners and leavers

Not all GPs buy into a share of the practice property, but most do and, understandably, this share needs to be bought back when a GP leaves a practice. As funding this purchase will be increasingly expensive for new GPs joining the practice or for existing GPs increasing their share of the practice premises, it will make it more problematic for such transactions to be negotiated. 

If a prospective new GP for your practice faces high borrowing costs to buy-in, they may see a net loss from buying into the property when looking at the net cash position of notional rent less tax and pension liabilities and the cost of capital repayments and interest making it less attractive to buy into the property. However, the prospective GP will be building up equity in the property. This may have a knock-on effect for recruitment of GPs, for example, it may not always be possible for partners to insist that a new GP buys into the practice property as part of joining the partnership. Or it may be necessary to offer a phased buy-in arrangement, increasing the investment of the new member over time but limiting their initial costs. 

Similarly, it may be more difficult to accommodate the buy-out of a leaving or retiring GP’s interest in the practice property. Their fellow partners may not wish to increase their share in the property by taking on further expensive borrowing, they might not want to finance it and may have concerns about selling their larger share when they wish to leave/retire. 

As with all significant transactions that take place within a GP practice, understanding the cashflow implications and tax impact of all the options is vital to ensure that the partners can make the best decisions for them and the business. We have extensive experience in profit forecasting for practices and can help you understand the impact of transaction on your days to day finances as well as the longer-term tax implications. 

For help and advice on any tax or financial modelling issue for you practice, please get in touch with our team. 

Contact

Juliette Smith, Midlands Director/Private Client Services
E: Juliette.Smith@bdo.co.uk
DDI: +44(0)121 265 7209
Mobile: +44(0)7807 021 030

Aimee Winterbone
Director; Medical/Business Services & Outsourcing
E: aimee.winterbone@bdo.co.uk
DDI: +44(0)1473 320803
Mobile: +44(0)7553 201456