As soon as there is any change in partnership property or partnership membership speak to your accountant to check all the financial and non-financial factors to consider. Nick Holmes* advises on what to watch:
- Existing partners: with a change in profit sharing ratios is there to be a change in property ownership as well?
- Ensure you use up your annual exemptions for Capital Gains Tax and that the transaction qualifies for entrepreneur’s relief.
I recently took on a new client where they made a property change mid-year but there was no profit-sharing change. Therefore, some partners did not qualify for entrepreneur’s relief as they had not reduced their commitment to the partnership within the time frame.
- Changing from property ownership to leasehold: ensure you understand if there are VAT implications for this and whether all the VAT cost on the rent will be reimbursed by the NHS or not.
Also, existing property owners selling may not be the continuing partners who are signing the lease – understand the implications for future changes and the ‘last person standing’ situation.
- Partnership agreement: is it up to date and does it reflect the current partners’ wishes and understanding of how to deal with changes? For example, the compulsory purchase or ‘option’ to buy out a partner on retirement/departure or death.
- Accession/joining deed: rarely does a new partner sign a partnership agreement before or on day one of joining. So, is the offer letter detailed enough to refer to issues like earnings, property, subscriptions, seniority, and holiday with reference to the partnership agreement?
- Departure deed: this is not always needed if your partnership agreement is sufficient but it is advisable.
Is there a clause covering the partnership and outgoing partner for after-departure superannuation and seniority adjustments? After-date seniority clawbacks do occur and can be considerable.
- Superannuation payments and dealing with Primary Care Support England (PCSE): for new joining partners the payments may not start for the first year of a GP being a partner. Understand the tax implications of delays in payment.
- New partners joining: should profit sharing be at 100% parity, at reduced parity for a period or should it even be a fixed core amount with an allowance for the employer’s superannuation?
Also, estimate and confirm the drawings for new partners both before and after they have joined so that there are no surprises.
Ensure that any subscription costs are considered correctly. Some pay through the partnership bank account and some personally.
- Partnership debt: ensure that the partners’ names on the title deeds and any declaration of trusts/bank documents are reviewed and amended at every point when a partner joins or leaves.
A single change every few years may be supported by the bank but multiple changes in a short period of time that should have been made years ago could lead to the debt being called in and redemption penalties being imposed.
- Saving for tax within the practice or personally: partners joining who used to be employed could go 21 months without paying any tax and then have a sizeable tax bill due.
Ensure you are planning for it in line with the profits earned and drawings being paid.
For partners leaving there could be a ‘tax time bomb’. It is important that predictions are made before a partner ceases the partnership and an agreement reached as to who will be paying the tax bills to prevent overdrawing in the partnership or overspending personally.
- Partners drawing an NHS Pension due to taking 24-hour retirement while working or at retirement from the partnership: check your tax code and ensure that it falls in line with the tax reserves being made either in your partnership for you or by you personally.
Far too many times I have seen pension incomes undertaxed and then an unwelcome tax bill coming at the same time as a reduction to pension income - a double blow.
- Valuing the partnership premises: on average partnership changes used to happen every few years. But now there can be multiple changes in the same year.
Consider an agreement to only value the premises, say, every two or three years at most. If there is a partnership change in the following one to two years after the last valuation, then that last valuation will be used to reduce requests for multiple valuations and therefore multiple valuer’s fees.
- Rights to future income: I have seen a few occasions in the past year where some retiring partners have claimed a right to the future solar panel income.
This needs to be documented in the partnership agreement to prevent unnecessary disputes and legal costs after a partner retires.
- Calculating profits in the final year or period when a partner leaves: watch out for premises costs incurred in the final period where the cost is perceived to benefit future partners more than the partner who is leaving.
Also, be careful to apportion income received or costs incurred to continuing partners after a partner leaves if the departure happens mid-year and full accounts are not prepared to that date. A departure deed can assist here.
The most important advice I can give is to communicate more and keep on good terms with all partners in the event of any change. Look at all changes as a situation to be discussed with your AISMA accountant.
*Nick Holmes is a partner at Darnells
This article first appeared in the Autumn 2018 issue of AISMA Doctor Newsline, the newsletter of the Association of Independent Specialist Medical Accountants.
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