When a GP partnership owns or builds its own surgery, the NHS does not simply leave the building cost with the partners. It reimburses the cost of providing those premises through one of a small number of defined routes: notional rent for owner-occupiers, the older cost rent scheme for some legacy practices, and improvement grants towards development. This guide explains how each route works, who sets the figure, and the tax point that practices most often get wrong, which is that the reimbursement is taxable income to whoever owns the premises, set against the loan interest, repairs and other costs they incur.

Premises funding is its own specialist subject, and the numbers are property-specific. The amounts are assessed case by case, so this page sets out the framework and the tax treatment rather than promising any particular rent figure. Premises decisions, and the funding routes that support them, are an area where practice-specific advice genuinely matters.

Why GP premises funding is its own subject

Most NHS general-practice income arrives through the core contract: the Global Sum weighted by the Carr-Hill formula, plus the Quality and Outcomes Framework, enhanced services and network funding. Premises are funded separately. The cost of providing the surgery building is reimbursed under a distinct framework, the NHS Premises Costs Directions, rather than out of the core contract streams.

That separation matters because an owner-occupier partnership has three things running at once: a real building, a real loan secured on it, and a separate NHS income stream that reimburses the cost of providing the premises. Understanding how those three interact, and how the reimbursement is taxed, is the heart of premises planning. It is also why premises sit near the top of any conversation about owning a surgery, joining a partnership, or planning a partner's exit. For the human and contractual risk side of premises ownership, see our guide on the last man standing premises risk, and for the wider own-versus-rent decision, see our own vs rent tax guide.

The current instrument is the National Health Service (General Medical Services - Premises Costs) Directions 2024, in force from 10 May 2024. They replaced the 2013 Directions, which were revoked on 9 May 2024. The framework before that ran from the 2004 Directions, then the 2013 Directions, so the 2024 instrument is the third generation of the modern premises-costs regime.

The Directions set out the routes by which a commissioner (now an Integrated Care Board, or ICB) reimburses the cost of providing GP premises. The main routes are notional rent for owner-occupiers, the legacy cost rent scheme, leasehold rent reimbursement for practices that lease their surgery from a third party, and improvement grants towards development and improvement works. This page covers notional rent, cost rent and improvement grants in detail; the leasehold reimbursement route, and the own-versus-rent choice that sits behind it, is covered in our own vs rent tax guide.

Notional rent: the owner-occupier route

Where the partnership (or its separate property partnership) owns the surgery, the NHS pays a notional rent. This is a current-market-rent assessment of what the premises would let for if the practice were a tenant rather than the owner. In effect the NHS treats the practice as if it were renting its own building and reimburses that notional rent, recognising that the owner is providing premises the NHS would otherwise have to fund some other way.

Who sets the notional rent

The figure is assessed by the District Valuer (the Valuation Office Agency's District Valuer Services), or by an appointed or independent valuer acting for the commissioner. The 2024 Directions widened who can act, introducing the concept of an appointed valuer alongside the District Valuer. The assessment is independent of the practice, which is part of the point: the reimbursement is meant to reflect genuine market value, not a figure the practice puts forward.

Because the assessment depends entirely on the specific building, its size, condition, location and the local market for clinical or commercial space, the figure is genuinely property-specific. There is no national notional-rent rate, and a figure from one practice tells you almost nothing about another. This is precisely why we do not quote a notional-rent number: any sensible figure has to come from a valuation of your actual premises.

The assessment basis

Notional rent is assessed on notional lease terms, as if the practice held a lease of its own building. The terms are typically a long lease (commonly framed around a fifteen-year term) on a tenant internal-repairing basis, with the landlord responsible for external and structural repairs and for insurance. The valuer assesses the rent a hypothetical tenant might reasonably be expected to pay for the premises on those terms at the valuation date.

The assessment is reviewed periodically, commonly around every three years, so the reimbursement keeps broadly in step with the market. A review can move the figure in either direction. Practices sometimes assume notional rent only ever rises; in a soft local market it can be held or reduced at review, which is one reason premises income should be budgeted rather than treated as fixed.

The owner-occupier choice

Under the 2024 Directions an owner-occupier chooses either reimbursement of borrowing costs or notional rent, not both. The two routes are alternatives, not additions. For a practice taking on a development loan today, the practical choice is between a borrowing-cost basis and the notional rent basis, and the right answer depends on the loan position, the build cost and the likely market rent. This is a District-Valuer-and-adviser question rather than a one-size answer.

Abatement where a grant was taken

Notional rent is abated (reduced for a period) where a grant or public capital funded part of the development or improvement. The logic is straightforward: the NHS should not reimburse the same cost twice, once through the grant that helped build the premises and again through full notional rent. The abatement period is scaled to the size of the grant, with the bands set out in the Directions. Practices that took an improvement grant should expect their reimbursement to reflect that abatement, and should factor it into any premises-income forecast.

Cost rent: the legacy borrowing-based scheme

Cost rent is the older reimbursement scheme. Instead of being based on open-market rental value, it is based on the actual cost of acquiring the site and building or improving the premises, essentially the borrowing and build cost. It was designed in an era when the policy aim was to encourage GPs to develop purpose-built surgeries, by reimbursing them broadly in line with what the development actually cost to finance.

Closed to new schemes

Cost rent is no longer available for new schemes. It survives only for some existing practice premises that were originally set up under it. If your practice is not already on cost rent, it is not a route you can choose now: the owner-occupier choice today is between borrowing-cost reimbursement and notional rent. Cost rent is best understood as a legacy arrangement that a minority of long-established practices still hold.

How cost rent behaves

Cost rent tends to sit above notional rent in some cases, because it reflects historic financing costs rather than current market value, and it is generally not subject to the same periodic market review. There is, however, a requirement to convert to notional rent once the underlying mortgage is repaid. That conversion point is important: a practice that has paid off its development loan and converts to notional rent moves onto a market-rent basis, which may be higher or lower than the cost rent it was receiving. Practices on cost rent often review, well before redemption, whether converting to notional rent is likely to leave them better or worse off, so there are no surprises at the switch.

Improvement grants

An improvement grant is a capital grant from the commissioner towards developing or improving premises. The 2024 Directions expanded the grant regime, allowing grants of up to 100% of project value (previously capped at a lower proportion) and broadening the eligible purposes, including fit-out works on new builds and the purchase of land for extensions. The aim is to make it easier for practices to invest in premises that the wider system needs.

The abatement and clawback period

A grant is not free money. It comes with a rent-abatement period scaled to the size of the grant. Smaller grants carry shorter abatement periods and the largest grants carry the longest; the 2024 Directions set the bands, which run across a range of years depending on the grant size. During the abatement period the notional rent is reduced to reflect the public money already invested, and if the practice ceases to use the premises within the relevant period a proportion of the grant may become repayable. The exact bands and conditions are in the Directions, so the right approach is to treat a grant as carrying ongoing obligations rather than as a one-off windfall, and to model the abatement into the premises-income forecast from the outset.

Negative-equity protection

The Directions contain a protection that matters when a practice is winding down or relinquishing premises: an owner-occupier cannot be required to repay more than the actual sale price (or the best price reasonably obtainable on the open market). A grant clawback therefore cannot, by itself, push the partners into negative equity. This is an important mitigation rather than a complete answer to premises risk, and we cover it in more depth, alongside the wider exit problem, in our guide on the last man standing premises risk.

How each route is taxed: the part most guides skip

Here is the point that premises guides most often gloss over. Notional rent and cost rent are taxable income of whoever owns the premises. They are received because the owner provides the building, so they are income in the owners' hands, whether that is the property-owning partners or a separate property partnership or LLP. The reimbursement is not a tax-free grant; it is rental-style income that has to be reported.

Set against the premises costs

Against that reimbursement the owners set the deductible costs of holding the premises. The main one is the interest element of the loan or mortgage used to acquire or develop the surgery (interest only, not capital, see below). On top of that come repairs and maintenance, buildings insurance and other running costs of holding the property. The net of the reimbursement less those deductible costs is the figure that is actually taxed. In practice, on a recently developed surgery with a large loan, the interest deduction can be substantial, so the taxable net can be modest in the early years even though the gross reimbursement looks sizeable. For the wider list of deductible premises costs, see our guide to GP tax deductions.

Where the income sits

The structure decides where the income and the deduction land. If the premises are held inside the medical partnership, the reimbursement flows through the partnership accounts and into the partners' profit shares, taxed as self-employment income alongside the rest of the practice profit. Our GP partnership tax guide explains how profit shares are taxed, and our guide to profit-sharing tax planning covers how income like this is allocated between partners.

If instead the premises sit in a separate property partnership or LLP (a common arrangement, and the structural default we discuss in the own vs rent tax guide), the reimbursement is taxed in that vehicle and allocated to its members. The interest deduction follows the income: it belongs to whoever bears the loan in the same vehicle that receives the rent. Getting these two on the same side is important, because if the owner of the premises and the borrower are not aligned, the interest relief can be lost or mismatched.

Capital repayments are not deductible

Only the interest element of loan repayments is allowable, never the capital. The capital repayment reduces the outstanding loan; it is not an expense of earning the rent. Treating the whole monthly repayment as deductible is a recurring error, and it overstates the deduction by a large margin on a repayment mortgage. Always split the statement into interest and capital, and deduct only the interest.

Improvement grant treatment

An improvement grant is treated as a capital contribution towards the asset, not as taxable rental income. It reduces the effective base cost of the premises and interacts with capital allowances and the future capital gains position rather than appearing as income in the year of receipt. The disposal-side effect of a grant is a specialist point, and we deal with the capital allowances and capital gains tax angle in the own vs rent tax guide.

A worked illustration

The figures here are illustrative only, chosen to show the mechanism. They are not a guide to any real surgery's notional rent, which is District-Valuer-assessed and property-specific.

Imagine an owner-occupier partnership that holds its surgery in a property partnership and has a development loan still part way through its term. The property partnership receives notional rent assessed by the District Valuer. Against that it sets the interest on the development loan (the capital repayments are excluded), the cost of repairs and maintenance during the year, and the buildings insurance premium. The result, after deducting those allowable costs from the gross reimbursement, is the net taxable amount. That net figure is then allocated to the property partners in line with their shares of the property partnership and taxed in their hands.

The shape of the result is the lesson, not the size. Early in a loan's life, when interest is at its highest, the deductible interest can absorb a large part of the reimbursement, so the taxable net is relatively small. As the loan is paid down and interest falls, the taxable net rises. Premises income is therefore not a flat, predictable line; it changes as the loan profile changes, which is worth building into the practice's tax forecasting.

Notional rent vs cost rent: which leaves a practice better off

There is no universal answer, and this is not advice for any particular practice. As a general framing: cost rent can be higher in some cases but is fixed to historic cost and is required to convert to notional rent on mortgage redemption, while notional rent tracks market value and is reviewed periodically. Which route leaves a practice better off depends on the loan position, the building, and local market rents at any given point. For a practice already on cost rent, the live question is usually whether and when conversion to notional rent improves matters; for a new owner-occupier, the route is notional rent (or borrowing-cost reimbursement) because cost rent is closed. The right call is a District-Valuer-and-adviser question, taken with the specific numbers in front of you.

Common mistakes practices make

  • Forgetting the reimbursement is taxable. Notional and cost rent are income to the owners, not tax-free receipts, and must be reported net of allowable premises costs.
  • Deducting capital repayments. Only the interest element of the loan is allowable. Deducting the whole repayment overstates the deduction substantially.
  • Ignoring abatement. Where a grant was taken, the notional rent is abated for a period. Forecasting full rent during the abatement window overstates the income.
  • Staying on cost rent past mortgage redemption without reviewing. Conversion to notional rent is required on redemption, and the figure can move either way, so the position should be reviewed in advance.
  • Misaligning ownership and the interest deduction. If the premises owner and the borrower are not in the same vehicle, the interest relief can be lost or mismatched. The own vs rent tax guide covers structuring this cleanly.

How we help GP practices with premises funding

We work with GP partnerships and their property partnerships on the accounting and tax side of premises funding. In practice that means making sure notional rent or cost rent is reported correctly as income, that the interest element of the loan (and not the capital) is the figure claimed, and that repairs, insurance and running costs are picked up against the reimbursement. We also help model the effect of abatement where a grant has been taken, and the likely tax consequence of converting from cost rent to notional rent on mortgage redemption.

Because premises sit at the intersection of the practice accounts, the property vehicle and the partners' personal tax, the value is usually in joining those up so the income, the interest deduction and the partners' shares are all aligned. For the structural and disposal-tax side, see our own vs rent tax guide; for the liability side, the last man standing premises risk; and for our wider work with GPs, see how we help GPs, the rest of our practice management guides, or get in touch.