Surgery owners beware! Poorly drafted Partnership Agreements can trigger unwelcome tax charges 

If you are a primary care professional who owns or has a share in the surgery premises, it is crucial that you understand not only how the property is held, but also ensure that ownership is documented correctly in a partnership agreement or a separate declaration of trust document. Failure to do so could have significant legal and financial implications.

Read on to understand how you may inadvertently trigger unwelcome Stamp Duty Land Tax (SDLT) charges when partners buy into or out of the surgery and how to reduce the risk. 

What’s the problem?

For various good tax and business reasons it is very common for GPs to want to hold their freehold surgery as a ‘partnership asset’. However the default position in law is that a property is owned personally by the individuals named on the title at the Land Registry, and it is NOT a partnership asset unless there is reliable evidence to demonstrate that it is. This evidence is usually in the form of a signed and dated deed or contract, such as a partnership agreement or declaration of trust.

It is not sufficient to rely on the partnership accounts as evidence of the premises being a partnership asset, as it is highly unlikely that this would stand up in court.

If you cannot prove that the premises are a partnership asset, then:

• you may have to pay Stamp Duty Land Tax (SDLT) when partners buy-in or are bought-out of the surgery
• it could lead to disputes over rental income and ownership rights with retired partners who are no longer part of the practice
• you may well be in breach of your mortgage conditions
• you could even be in breach of your GMS contract

Identifying possible issues

There are many scenarios that could cast doubt on the premises being a partnership asset. Listed below are a few recent examples that we have come across – do you recognise any of them as applying to you?

1. The partnership agreement does not clearly state that the surgery is a partnership asset, although the accounts show that it is included on the balance sheet.
2. A partner has moved their share into a spouse’s name or a SIPP (even though they have remained on the title).
3. The building is wholly owned by retired, former partners
4. The partnership has ceased to exist – either temporarily or permanently. This may occur if you have practised as a sole trader for a short amount of time, or you have incorporated the practice into a limited company.
5. The property owning partners have put a lease in place to the partnership
6. An employee owns a share in the surgery (such as a practice manager or salaried GP).
7. The title owners have not signed the Partnership Deed which purports to turn their building into a partnership asset
8. Notional rent is paid to retired partners, rather than interest on any capital not yet paid out.
9. The names on the title are not current property owners. Ask yourself: will the ‘title owners’ agree that they are simply unpaid trustees holding the surgery on behalf of the partnership?
10. A Declaration of Trust does not link surgery ownership to the medical partnership – you may have created a separate property investment partnership, which will have completely different rules.

How to protect yourself

Your partnership agreement and/or declaration of trust should include:

1. a clear statement that the property is a Partnership Asset
2. distinction between the property owning partners and non-property owning partners
3. allocation of costs into ‘ownership’ costs (mortgage, property taxes) and ‘partnership’ costs (heating, lighting, cleaning)
4. a ‘licence to occupy’ to non-property owners
5. provision that notional rent received via the GMS contract ‘belongs’ to the property owners
6. an indemnity to the non-property owning partners if the premises are mortgaged
7. details of what is to happen with the surgery on retirement of a property owner

You may be tempted to put off addressing your poorly drafted partnership agreement until it is absolutely necessary, but you should be aware that rectification is rarely a quick process as there is registered property and a lot of money involved. It’s much better to fix any problems now, rather than when you are trying to complete a buy-in or buy-out with bank financing.

Also, if the property is not currently a partnership asset but you want it to be, consider making the change sooner rather than later. It takes three years after becoming a partnership asset for a surgery to be free of SDLT restrictions such that future transactions can benefit from the ‘intra-partnership exemption’. Smart succession planning makes the change in plenty of time.

How DR Solicitors can help

A great first port of call would be to reach out to us for a free partnership asset health check.

Don’t be tempted to cut corners by drafting documentation yourselves or going to a non-specialist solicitor. The building is simply too valuable to take unnecessary chances with, and remember that small errors in drafting can have very significant consequences.

As DR Solicitors we have the UK’s largest team of specialist medical solicitors, and you can be confident that we understand the critical nexus between property law and partnership law required to get the position with your freehold surgery correctly documented.

Next steps

For more information or a free, no obligation call with one of the DR Solicitors team, please contact us.