Scheme borrowing

Annual allowance restrictions and further reductions imposed by the Tapered Annual Allowance and Money Purchase Annual Allowance have reduced the pace at which a SIPP or SSAS can be funded.

As a result, purchase of assets such as commercial property cannot always be afforded outright and for this reason, the maximum limits that a SIPP/SSAS can borrow should be understood.

The Pensions Tax Manual confirms that scheme trustees may borrow funds for any purpose providing that they or the scheme administrator are satisfied that the borrowing will benefit the scheme and that the borrowing falls within rules laid down by the Department of Work and Pensions.

Maximum limits for borrowing in a SIPP/SSAS

A scheme may borrow an amount up to the equivalent of 50% of the net value of the fund prior to the borrowing taking place. The value of the fund for this purpose would not include the investment that is to be purchased with the borrowing.

As an example, a SSAS with a total value of £250,000 all held in cash deposits could borrow up to £125,000 giving it buying power of £375,000.

Care should be taken when calculating the maximum additional borrowing that can made where the scheme already has some borrowing in place. In these circumstances, the net value of the scheme’s assets should be calculated taking into account the value of any current borrowing before the 50% limit is set. From this limit, it is then necessary to deduct any current borrowing to determine any additional borrowing that may be available.
 
As an example:

• SIPP holding a commercial property valued at £600,000
• Outstanding debt of £100,000
• Looking to acquire another property using additional borrowing
• The net value of the scheme is calculated as £600,000 minus £100,000 = £500,000
• Initially, 50% of this net value is £250,000 but from this sum, we must deduct the current debt of £100,000
• Meaning additional new borrowing is limited to £150,000

Borrowing can be from any source, be it an unconnected third party or a connected party to the scheme but if the latter, the terms of the borrowing must be on commercially available terms. 

Purchase to include VAT

A further misunderstanding is that additional borrowing can be obtained to cover the temporary need to fund VAT on a property purchase where the scheme elects to opt for VAT and can thus reclaim it. In these circumstances, any borrowing to cover the VAT element must fall within the maximum 50% of net scheme assets rule.

No test on like for like refinancing

The test to determine maximum borrowing is undertaken at the point the borrowing is taken out and future tests are only undertaken if new or replacement borrowing occurs. There are instances where a current debt might exceed 50% of the current scheme net value. This might be if the original borrowing occurred under a previous, more generous borrowing regime or where the value of assets may have fallen since the borrowing took place. In either situation a remortgage, possibly to obtain better rates, might be desirable.
 
Provided certain criteria are met, special considerations can apply. If the debt is to be genuinely restructured, provided there is no increase in the amount borrowed, no retest needs to be carried out. A change of lender, increase in the repayment period or change of interest rate on their own would not trigger a retest against the 50% limit. Although the rolling up of interest and capitalisation of that interest or indeed any increase in the sum borrowed would trigger a new test.

Security

It is not a requirement that scheme borrowing be secured, although in practice any third party lender is almost certain to insist upon the debt being secured with a charge over scheme assets. An example of where security might not be required is where a VAT elected scheme perhaps has sufficient assets to cover the cost of a property purchase but not the VAT element on top. A connected lender might take the decision that the cost of a secured charge is not warranted bearing in mind the debt would be repaid immediately after the VAT paid on purchase was recovered under the scheme’s subsequent VAT return.
 
Although largely used for asset purchase, borrowing might be necessary for other purposes such as when liquidity is required to pay retirement or death benefits or to transfer to another pension scheme a member’s benefits or an ex spouse’s benefits following a pension sharing order.