Acquiring a care home can be a lucrative and impactful investment, but it also comes with a complex range of considerations.
There are approximately 17,000 care homes in the UK, with around 70 per cent of them being residential, according to Care Home UK. With an aging population, care homes are increasingly becoming one of the fastest growing industries of our time, making them a rewarding and lucrative investment. However, purchasing a care home comes with unique risks and complexities. This article aims to provide guidance to those considering buying their first care home, or those looking to expand their existing portfolio.
Understanding Restrictive Covenants and Use Planning for Care Homes
One of the first and most important factors to consider when purchasing a care home is the property's use class and any restrictive covenants that may limit its operational scope. Care homes generally fall under Use Class C2 (Residential Institutions), which applies to establishments providing residential accommodation and care for those in need. However, the planning regulations differ for various types of supported living arrangements, which can affect your ability to adapt the property to other forms of care.
Supported living arrangements, which provide more independence to individuals who only require occasional assistance, can in some circumstances fall under Use Class C3 (Dwelling Houses). The distinctions between C2 and C3 use classes are critical because they influence not only the planning permissions required but also the long-term operational flexibility of the property. If you intend to transition a property from a traditional care home to supporting living, for example, you may face additional planning hurdles or restrictions. It is however important to note that the materiality of a change in use is assessed on a case-by-case basis and not all changes in use require planning permission.
Some properties are burdened with restrictive covenants that confine their use to specific types of care, such as nursing or residential care. It is important to conduct thorough due diligence to ensure that the property you intend to purchase has the correct planning permissions in place and to determine if there are covenants which may limit future use. Failure to comply with planning requirements can lead to delays, enforcement actions or even barriers to operating the care home as intended.
Tax Implications: SDLT and VAT Considerations
Care homes are typically subject to commercial SDLT rates rather than residential ones.
VAT on care homes can be a complex area, especially for development and construction. The provision of care services is generally exempt from VAT, however when the seller has opted to tax the property, they will have to charge VAT on the sale unless it can be treated as a transfer of a going concern. The construction of new care homes may qualify for zero-rated VAT. On the other hand, refurbishment and redevelopment of existing properties might attract standard VAT rates. Working alongside tax professionals to structure the acquisition and development effectively is essential to minimise tax liabilities due.
Energy Efficiency
Energy efficiency is an increasingly significant issue for care home investors, particularly given that the UK has the oldest stock of care homes in Europe. As energy costs rise and regulations tighten, care homes must meet strict energy performance requirements, which can impact both operational costs and future property value.
The age of many UK care homes means they are often less energy-efficient, leading to higher running costs and potentially greater refurbishment expenses. For those acquiring or operating older care homes, this creates both a financial and regulatory burden. Significant investment may be required to bring these properties up to modern efficiency standards, which can also influence financing options, as lenders increasingly consider sustainability in their lending criteria.
The Role of the Care Quality Commission and Funding
The job of overseeing the care home sector has, since 2009, fallen to the Care Quality Commission (CQC), established by the government to regulate and inspect health and social care providers in England. However, it is apparent that this regulatory body has its shortcomings, and in May 2024 the government said it would undertake a review of operational effectiveness in the CQC.
In November 2023 the CQC began to roll out the Single Assessment Framework to help simplify and improve the care home assessment process. However, this reform has not set out what it intended to do. Many new ratings are affected by poor scores of "Inadequate" or "Requires Improvement" which have been carried over from previous inspections and do not fairly reflect the improvements that have since been made. The aim of the Single Assessment was to be quicker, however, has meant that there are fewer on-site visits by the CQC and care homes which are no longer 'Adequate' and are rated 'Outstanding' have to wait 12-24 months for a visit from the CQC to update their rating. The shortcomings of the CQC will have a larger impact on those with a smaller portfolio of care homes as those who have invested significant amounts of money in improvements, without an updating CQC rating, may then struggle to attract private fee-payers.
CQC ratings also play a significant role in securing funding or refinancing care homes. Lenders are increasingly cautious about providing finance to care homes with low CQC ratings. If a care home received a negative CQC report, it could find it difficult to secure refinancing or may face higher borrowing costs. For prospective buyers, understanding the care home's CQC rating is more important than ever now, given that it may take 24 months to receive another visit from the CQC to have a rating updated.
The effectiveness of the CQC was central topic of discussion at a recent roundtable event on the care sector, produced in partnership with the Business Magazine and held at our offices. The discussion explored the growing demand for care homes and the increasing strain this has placed on the sector.
How can we help?
Purchasing a care home offers significant opportunities and can be a very rewarding investment. However, investors must be fully alive to the variety of challenges that can arise with this type of transaction. Whether you're a first-time buyer or looking to expand your care home portfolio, it is always worth seeking legal assistance when purchasing or selling a care home.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
