Dental practice premises finance: buying your surgery building

• The landlord offers to sell. Often the strongest negotiating position a principal will have, because a sitting tenant with specialist fit-out is the obvious buyer and the landlord knows it.
• The lease is running short. A lease with only a few years left can depress the value of the practice and make a future sale harder, because buyers and their lenders want security of tenure that outlasts their loan.
• The practice sale includes the freehold. The building is valued and funded separately from the goodwill; our page on dental practice acquisition finance covers the goodwill side.
• Growth needs more surgeries. A practice that has outgrown its building may buy larger premises nearby and relocate.
• Setting up a new practice. Some dentists buy rather than lease the building for a start-up, though lenders are more cautious when the practice has no trading record; see squat practice finance.

Unlike GP surgeries, NHS dental contracts in England do not generally include a separate payment towards premises costs, so the mortgage has to be serviced from ordinary practice profit.

A lender secured on your building values it as bricks and mortar, not as a working practice. The valuer asks what the property would sell or let for with vacant possession, to any occupier, which can be well below what you believe it is worth to you.

• Specialist fit-out adds little. Surgery plumbing, suction runs, compressor rooms, a decontamination room and lead-lined imaging rooms cost a lot but may add little to vacant possession value, because another occupier might strip them out.
• Alternative use matters. A building in a town centre or on a busy road with parking has a wider market than a converted house on a residential street.
• Planning status. In England, dental surgeries fall within Class E, which gives flexibility to change between many commercial uses. A former house converted under an older planning consent, or a building with restrictive conditions, narrows the market. The government's guidance on when planning permission is required explains how use classes work.
• Flats above. Many high street practices have flats on the upper floors. Lenders treat these differently from the surgery, and some fund them only under separate terms. If you or your family would live in a flat, that part is residential lending, which falls outside what we arrange.

Some healthcare lenders will also look at the value of the building as an operating dental practice, but they still check the bricks and mortar figure. Expect the loan to be sized against the lower of the two.

The option to tax

Commercial property sales are normally exempt from VAT, but a seller who has opted to tax the building must charge VAT at the standard rate on the price. Most dental treatment is VAT exempt, so a practice buying an opted building usually cannot reclaim that VAT, and it becomes a real cost. A sitting tenant buying the freehold will not normally benefit from the transfer of a going concern treatment that removes VAT from many investment sales. Ask early whether the seller has opted to tax.

Buying personally and letting to the practice does not automatically solve it. Anti-avoidance rules can stop an option to tax working where the landlord is connected to an occupier that cannot recover VAT, so take VAT advice before exchange rather than after.

Stamp Duty Land Tax and fixtures

Budget for Stamp Duty Land Tax at the non-residential and mixed-use rates in England, or the equivalent tax in Scotland and Wales. Buildings with residential flats may be treated as mixed use. Separately, fixtures such as heating, electrical and water systems can qualify for capital allowances, but the right to claim can be lost on purchase unless the buyer and seller deal with it in the contract. Your solicitor and accountant should cover this before completion.

Illustration only, with round hypothetical figures. A principal has run a four-surgery practice from a leased building for twelve years. The landlord offers the freehold for £400,000. The valuer puts vacant possession value at £380,000, and the lender offers a mortgage based on that lower figure. The principal buys personally, puts in a deposit from savings and grants a formal lease to the practice company at a market rent set by the valuer. The rent covers the mortgage payments with a margin, and the practice's profit comfortably covers the rent. Before exchange, the principal's accountant confirms whether the landlord has opted to tax and whether any VAT would be recoverable. Ten years later the practice is sold to a group, and the principal keeps the building as an investment let to the buyer.

Owning the building concentrates your practice, your income and a large part of your wealth in one place. If the local area declines or you want to relocate, a building is slower to sell than a lease is to assign. Personal guarantees are common where a company borrows. Repairs and dilapidations that a landlord would have shared become yours. And if you plan to sell the practice, some buyers will want to buy the building too, while others will only take a lease, so the ownership structure you choose now affects your exit.

Renting is not a failure. A long lease on fair terms, with rent reviews you can live with, can leave capital free for equipment and growth. Compare the total cost of owning, including stamp duty, any irrecoverable VAT and maintenance, with the rent you pay now. If you already own the building and want to release capital or reduce payments, see commercial property refinance.