As The Healthcare Sector Booms, The Right Financial Structure Can Maximise Margins

In a world facing economic uncertainty and the continuing impact of the pandemic on real estate, investors are seeking safe opportunities. One area generating significant activity is the healthcare and later living sector. 

In the first quarter, investment in the UK’s elderly care sector reached £797M, a 55% increase year-over-year. 62% of elderly care providers expect to grow their portfolios over the next five years. 

But those keen to capitalise on this sector’s growth should take a considered approach to financial structuring, said Jason Dunlop, partner in real estate tax at professional services firm S&W. 

“Our investor and developer clients are entering the healthcare and later living sector, drawn by the strong fundamentals,” he said. “However, in this sector, picking the right financial structure can have real implications for tax. Taking the right advice now makes the difference between having the ability to mitigate tax liabilities or being liable for more than expected.”

S&W’s work in the healthcare and later living sector is increasing, Dunlop said. While the market has seen sizable portfolio acquisitions in the last year, there’s considerable mid-market activity as well as smaller deals due to consolidation. 

In Q1 2025, 68% of investment volume originated from U.S. funds, which are bringing their expertise from the more mature U.S. market, Dunlop said. Activity from REITs is a good indicator of the strength of the market, as they see long-term value in investing in this sector.

“The UK’s healthcare and later living sector is an immature market that needs high investment due to the aging population,” he said. “Although the increase of employers’ national insurance and the national living wage will have an effect, there’s clearly a demand for high-quality healthcare accommodation.”

Despite strong fundamentals, investors should be mindful of a number of tax-related matters that could affect the viability of investments, Dunlop said. The first is how to structure financing.

S&W is seeing a high level of sale and leaseback activity from business owners who want to release capital to invest more widely in either improving other properties or growing their portfolio. 

“Often, this is a better way to raise capital than to get a loan — selling the freehold then taking a long leasehold on the property,” Dunlop said. “However, the terms of the sale and leaseback can make or break the viability of the transaction, as this will affect the business’s capital gains tax exposure. If considered properly, the deal can be structured to mitigate exposure or remove it.” 

S&W also advises clients on stamp duty land tax relief, as their businesses could be eligible for sale and leaseback relief. 

Another area to consider is whether to structure as a WholeCo, one business that holds the real estate and operates the care home, or a PropCo-OpCo, where the PropCo holds the real estate assets and the OpCo manages the trading business and runs the facility.

Such a structure can bring VAT-related benefits, Dunlop said. Supplying from the PropCo to the OpCo is an HMRC-approved way to trigger a recovery of the input VAT a business has incurred on costs such as development expenditure. 

S&W also advises clients on matters such as capital allowances for development — a form of tax relief for capital expenditure incurred on prebuilt land and buildings. Care homes are not always classified as residential properties for tax purposes — for example, if they provide disabled or neurological care rather than supported living.

“There’s a fine line here about whether a property is treated as residential, which would not be eligible for capital allowances,” Dunlop said. “It’s worth investigating, because this can provide valuable relief for a business. However, you should never let the tax tail wag the dog — if the business plan is to provide supported living, then you can’t change this.”

Recently, HMRC made a change to VAT grouping for healthcare businesses that could have considerable impact, Dunlop said. Until now, a business regulated by the Care Quality Commission could group with another unregulated entity to have services provided via the local authority with a VAT charge attached. The outcome was that the business could then recover VAT on day-to-day expenditure.

However, HMRC has announced this structure is a form of VAT avoidance. It will refuse such new group applications and is likely to unravel existing structures, Dunlop said. 

“It’s early stages, but the strong recommendation is that anyone who has adopted this structure should seek independent VAT advice,” he said. “They should either prepare to unravel voluntarily or prepare for enquiries that are likely to arrive.”

As well as financial structuring, S&W supports businesses, including institutional investors and entrepreneurial business owners, with exit readiness. Clients often face the choice of whether to sell WholeCos or whether to split PropCos and OpCos, selling the real estate to one party and the operations to another, Dunlop said. 

“We work with investors to demerge the assets, giving owners flexibility on exit to either sell the business as a whole or as separate entities,” he said. “These can be quite complex arrangements and need to be carefully structured to avoid triggering unnecessary tax charges as part of the demerger process.”

S&W’s team is very familiar with the specific complexities faced by different real estate sectors, Dunlop said. The S&W brand is new but has a long history in the sector.

Earlier this year, the professional services element of Evelyn Partners was acquired by Apax and rebranded as S&W based on its heritage as the accountancy firm Smith and Williamson, which was founded in 1881. This rebrand has given the team an opportunity to provide a high-quality, partner-led service with a strong talent pool across all real estate sectors, Dunlop said.

“We know how to apply our industry-specific knowledge in a way that investors understand,” he said. “This includes specialist services that span the full investment lifecycle, from tax to transfer pricing, corporate finance and auditing. We’re familiar with the issues they encounter and know how to get to the answer fast, which is essential in such a growing sector as healthcare.”

This article was produced in collaboration between S&W and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.