Notional Rent vs Cost Rent: How NHS Funds (and Taxes) Your GP Surgery Premises

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. 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, and not 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.

The legal framework: the NHS Premises Costs Directions 2024

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.

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 instead of 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.

What does "notional" mean in notional rent?

Notional means the rent is never actually paid to a landlord by anybody. The partners own the building they work in, so no money leaves the practice for rent, and the NHS pays the owners what the surgery would let for if a tenant held it instead. The word describes an assumption; the payment it produces is real money arriving in the practice bank account.

That is also where the tax point starts. A sum paid in place of rent is still a receipt for providing a building, so the owners report it and set their premises costs against it much as any landlord would.

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. Any usable number 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. Schedule 2 Part 3 paragraph 5(c) puts the tenant's covenant at internal repairs and decoration, and the landlord's at insuring the building and carrying out external repairs and maintenance. 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, not treated as fixed.

How often is notional rent reviewed under the 2024 Directions?

Direction 43(2) places the review on NHS England, which must review the amount it pays as part of a three yearly review of the contractor's notional rent. That cycle can be brought forward where the purposes for which the premises are used change, or where NHS England has agreed further capital investment in the building and is paying for it under the GMS contract.

Schedule 2 carries a floor that practices rarely hear about. The notional lease the valuer is told to assume runs for a term of 15 years and includes rent reviews every three years, with the assumption that a fall at review does not take the rent below the initial level of notional rent payment made to the contractor.

Who is the valuer acting for?

The practice's own lever is direction 43(3). NHS England must not make notional rent payments unless the contractor has notified it in writing, within 12 weeks of the notice inviting a response, that it accepts or does not accept the assessed current market rental value. A longer period can be agreed between the two. Twelve weeks is time enough to take an independent surveyor's view before answering, so the date that notice lands belongs in the practice diary next to the year end.

That matters because the valuer is not on the practice's side of the table. Neither the District Valuer nor an appointed valuer is instructed by the practice, and neither carries any duty to put the practice's case for it.

Silence is the expensive option, because the payment does not start until the contractor answers. Where the reviewed figure comes in below what is currently being paid, direction 43(4) lets NHS England begin paying on the lower basis once that period has run, pending the conclusion of the review and any reconciliation of payments due.

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, not 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 instead of current market value, and it is generally not subject to the same periodic market review. Be careful with what is often said about the end of the loan. The 2024 Directions do not set out a cost-rent scheme (the phrase appears in them only in passing), so they do not impose a rule that cost rent converts to notional rent on mortgage redemption. What they do set out is the modern equivalent, and it points the same way: under direction 40(1)(a) NHS England pays financial assistance towards borrowing costs until the loan is paid off, and under directions 42(2) to (3) a contractor receiving those payments can elect to stop them and apply for notional rent instead, which NHS England must then grant.

On that borrowing-cost route, then, the practical end point is that once the loan is paid off the reimbursement moves onto a market-rent basis that may be higher or lower than what was being received. A practice on a legacy cost-rent arrangement should confirm its own terms with the commissioner and model the likely notional rent well before redemption, 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, not 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 with a narrow but useful reach. Directions 13(5) and 13(6) apply where an owner-occupier contractor has terminated its GMS contract before the guaranteed period of use expires, sells the practice premises, and there is no lease of the premises back to it and no possibility of such a lease. In that situation the repayable amount cannot exceed the actual sale price of the premises, or if higher the best sale price reasonably obtainable on the open market as determined by the District Valuer or the appointed valuer, and the amount repayable becomes the higher of those two figures.

So a grant clawback cannot, by itself, push the partners into negative equity on a genuine sale in those circumstances. Note the conditions: this is not a general protection covering every practice winding down or relinquishing premises, and a leaseback (or the possibility of one) takes the case out of it altogether. It is an important mitigation, not 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 are notional rent and cost rent taxed?

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 below are illustrative only. Notional rent is District-Valuer-assessed and property-specific, so no figure here is a guide to any real surgery.

Take a four-partner practice that holds its surgery in a property partnership, with a £900,000 development loan at 6% still part way through its term. In the year in question the property partnership receives notional rent of £78,000, pays £52,800 of loan interest, £6,400 of repairs and maintenance and £2,900 of buildings insurance. The monthly loan repayments also include roughly £24,000 of capital across the year, which is not deductible and does not appear below.

Illustrative notional rent computation for a property partnership, one year

Item	Amount
Notional rent reimbursement received	£78,000
Less loan interest (interest element only)	(£52,800)
Less repairs and maintenance	(£6,400)
Less buildings insurance	(£2,900)
Net taxable premises income	£15,900
Capital repayments (not deductible)	£24,000
Each partner's share on an equal four-way split	£3,975

Two things fall out of the arithmetic. First, the taxable figure is £15,900, not the £78,000 that lands in the bank, because the interest and running costs come off it. Second, if the partners had deducted the whole loan repayment, interest plus the £24,000 of capital, they would have shown a loss of £8,100 and understated their taxable income by the full £24,000.

The profile also moves over time. Early in a loan's life, when interest is at its highest, the deductible interest absorbs most of the reimbursement. As the balance falls and interest with it, the taxable net rises: on the same £78,000 rent, once interest has dropped to £20,000 the net taxable figure is £48,700. Premises income is therefore not a flat line, so the loan profile belongs in 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 does not follow the market, 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 a legacy cost-rent arrangement, the live question is usually whether and when a move 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.

Notional rent and cost rent compared, under the NHS (GMS - Premises Costs) Directions in force from 10 May 2024

Feature	Notional rent	Cost rent
Basis of the figure	Current market rental value of the practice premises	Historic cost of acquiring the site and building or improving the surgery
Who runs the review	NHS England, as part of a three yearly review under direction 43(2)	No equivalent market review cycle
Can the figure fall	Yes, subject to the Schedule 2 floor at the initial level of notional rent paid	Tied to historic borrowing, so it tracks neither direction of the market
Open to a practice today	Yes, this is the owner-occupier route	No, closed to new schemes
When the borrowing ends	Not applicable, the figure follows the market, not the loan	A legacy scheme sitting outside the 2024 Directions. On the modern borrowing-cost route, direction 40(1)(a) ends the payments when the loan is paid off and directions 42(2) to (3) allow an election for notional rent instead

What to do with the premises figure in your accounts

Most of the errors we see on premises income are the same four, and each belongs to a section above. The reimbursement is taxable and must be reported net of allowable costs. Only the interest element of the loan is deductible, never the capital. Where a grant was taken, the abatement has to be forecast in, not ignored. And the premises owner and the borrower need to sit in the same vehicle, or the interest relief can be lost or mismatched.

Because premises sit at the intersection of the practice accounts, the property vehicle and the partners' personal tax, the work worth doing is joining those three up: notional rent or cost rent reported correctly as income, the interest split out from the capital on every loan statement, repairs, insurance and running costs picked up against the reimbursement, and the abatement or the end of the borrowing modelled before it arrives. For the liability side of premises ownership, see the last man standing premises risk. If you want the numbers for your own surgery looked at, get in touch.