Your pension is designed to provide you with a steady income in retirement. However if you’re a business owner, a SIPP (Self-Invested Personal Pension) or SSAS (Small-Administered Scheme) can also be used to help your business.
Here are some key considerations:
- The rules around pension borrowing are complex
- Both SIPPs and SSASs can be used to help purchase business premises or other commercial property
- Neither type of pension can be used to purchase residential property
- A SSAS can be used to lend money to a sponsoring employer
- A SIPP cannot make loans to a connected party, i.e. you or your business
- Strict rules apply to both borrowing and lending, breaching them could result in HMRC making an unauthorised payment charge
Borrowing from your pension to benefit your business can be tax-efficient, but also means closely linking the fortunes of your business with your long-term retirement planning. Naturally we recommend speaking to a financial planner before making any decisions.
Why might your business need to borrow money?
If you are looking to expand your business, or need help to purchase premises, you might look to borrow money. You might consider a bank loan, an extension of your business overdraft, or even dipping into your own savings.
You’ll no doubt have undertaken detailed company financial planning, but sudden growth, the opportunity presented by a new project or the need to move premises, might lead to the need to raise capital.
If you need money now, have you considered borrowing from your pension?
As a business owner, this tax-efficient option can be a smart way for you to use the pension fund you’ve built up. But the rules are complicated.
How can a SIPP help?
If you want to use your pension to lend money to your business, you cannot use a SIPP to do this. Money from a SIPP cannot be lent to any individual, or company, who is connected with the SIPP.
A SIPP can lend money to unconnected third parties though, but only if the loan constitutes a genuine investment of the pension scheme, is granted on commercial terms, and is on a first charge basis.
You can use a SIPP to help purchase your business’s commercial property. To help facilitate the purchase your SIPP can borrow up to 50% its value from a bank, or other institution.
The property is then leased back to your business, with rent payable into the pension.
This tax-efficient investment can have other benefits for your business:
- Any additional pension contributions (within the Annual Allowance) made to aid the purchase will likely qualify for tax relief
- A lease must be put in place and rent must be charged at a commercial rate but is tax-deductible as a business expense
- No tax is payable on the growth in the value of the property while it is owned by the SIPP
- The property you buy (or invest in) using your SIPP does not need to be connected to your own business. You can usually buy or invest in any freehold or leasehold commercial property in the UK.
How can a SSAS help?
A SSAS can help you purchase your business’s commercial property in the same way a SIPP can.
In common with a SIPP, a SSAS can borrow up to 50% of its value and the property is leased back to your business, with rent payable into the pension. As with a SIPP, a lease must be put in place and rent must be charged at a commercial rate but is tax-deductible as a business expense.
A SSAS differs from a SIPP in that it can lend money to your business.
A SSAS loan can be a useful way to free up money, whether for business expansion or to finance projects. If you borrow money from your SSAS you usually will find that arranging a SSAS loan is quicker – and requires less underwriting – than applying for a bank loan. The interest rate may be lower too. Finally, you will not be asked to sign onerous personal guarantees or offer debentures over your business.
The rules surrounding these types of loans are strict and additional tax charges apply when certain conditions are not met. Specifically, the loan must satisfy five tests:
You can only borrow up to 50% of your pension’s net value. If your pension is worth £500,000 for example, you can borrow up to £250,000.
A loan to the sponsoring employer must be secured as a first charge on an acceptable asset. The asset does not need to be owned by the sponsoring employer but, at the time of the loan, the security used must be of at least equal value to the amount that is lent.
Commonly, your company premises will be used as an asset. You can use your business premises only if the valuation proves sufficient and the premises have no other charges against them. Commercial property is the most efficient form of security.
Other examples of acceptable security include plant equipment or residential property, although both can present difficulties. The asset doesn’t have to be owned by the sponsoring employer. It could be an asset you own personally, although this has its own set of associated risks.
Be aware that if the business defaults on the loan, the security (the asset over which the first charge is held) will be sold to provide the cash to repay the loan. This could cause severe detriment to your business.
The interest rate of the loan is selected by the scheme members. It must be a ‘commercial rate’ which is defined as 1% above the Average Base Rate of the six leading high-street banks, which are:
- Bank of Scotland
The rate of interest can be fixed, which means that no recalculations need to be carried out if the rate changes, as long as the terms of the loan don’t change.
The repayment term of the loan must be five years or less.
If at the end of this term the outstanding balance has not been paid due to the sponsoring employer experiencing financial difficulties, then the outstanding amount plus interest can be rolled over for a further five years.
This can only be done once and will not be treated as a new loan.
All loans made to a sponsoring employer must be repaid in equal instalments of capital and interest.
If the loan fails to meet any of these five tests, it will be deemed as an unauthorised payment and will be subject to tax charges.
Using your pension to buy a property you already own
A SIPP or a SSAS can be used to purchase a property that you or your business already owns.
The rules are the same as we explained above, although the transaction must be on commercial terms.
This option can be attractive to individuals or businesses who are looking for an injection of capital into their personal or corporate finances. However, careful tax planning needs to be considered as the sale could trigger a Capital Gains Tax (CGT) or Corporation Tax bill.
A warning about residential property
A SIPP or SSAS can be used to buy land for property development.
This is because land or buildings that are being either developed as or converted to, residential property, are generally not classed as residential during the period of construction or development.
The legislation doesn’t cover the exact moment a property ceases to be classed as ‘under construction’ or ‘in development.’ The one main test though, is that a building becomes residential once it is suitable as a dwelling. It is therefore usually considered that it must be sold before a habitation certificate is received.
What are the implications for the pension scheme?
If a property held in a SIPP or SSAS is deemed to have left a construction or development phase and become a residential property, the tax charges imposed by HMRC are penal.
This means, for example, that if a SIPP or SSAS was used to buy a commercial building with a flat above it and this did not meet the job related residential property criteria (possibly because it was occupied by a connected person, or by someone not required to live there as a condition of their employment), it would become subject to the following charges:
- An unauthorised payment charge of 40% incurred by the SIPP or SSAS members.
- A scheme sanction charge of between 15% and 40% payable on the value of the flat by the Scheme Administrator.
- A scheme sanction charge of 40% levied on income received annually.
Whenever a property purchase has a residential element, be sure to speak to your provider and us. Together we can help ensure issues are resolved before the property comes into the SIPP or SSAS, mitigating the risk of HMRC charges being levied.
Other borrowing options open to your business
Borrowing from your SIPP or SSAS to help your business can be complex. You might consider other options:
- An extension of your business overdraft
- Dipping into your own savings to inject money into your business
A bank might be unable to lend you the amount you need, and there are risks associated with using your own savings. Borrowing from your pension can be a tax-efficient way to use your pension investment. If you think it might be an option for you, speak to us.
Things to look out for
Generally, ‘releasing’ or ‘unlocking’ your pension before age 55 is not advisable. Except in certain circumstances (ill health or where your retirement age is protected), HMRC will deem a ‘loan’, outside of the rules we have outlined, or a ‘sale’ of pension funds as an unauthorised payment.
You could be hit with an unauthorised payment charge of 55% of your pension fund. This charge will apply regardless of whether you realise you’ve broken the rules and regardless of any other fees you have already paid to the company involved.
Firms offering this type of pension release are unlikely to be regulated by the Financial Conduct Authority (FCA) and this means that you will not be protected.
Borrow or lending from a SIPP or SSAS is more widespread and can benefit you and your business but it is essential that all HMRC rules are followed.
If you want to use a SIPP or a SSAS to support your business, you will need to transfer your existing pension. Transferring may incur a penalty and will almost certainly incur costs. However, these need to be balanced against the tax-efficiency, and flexibility, of purchasing a commercial property in your pension or borrowing from a SSAS. You can lend money from your SIPP to unconnected third parties. You cannot use your SIPP to lend money to yourself or a connected third party and doing so will be deemed an unauthorised payment by HMRC.
SSASs are an occupational pension and as such have a sponsoring employer. You can borrow money from your SSAS to loan to a sponsoring employer, but you must ensure the borrowing meets HMRC’s five tests.
This type of tax-efficient investing can be beneficial for you and your business, but a breach of the rules will result in an unauthorised payment charge being levied.
Your pension is designed to provide you with an income for the whole of your retirement. Borrowing money from your pension to finance business expansion or purchase commercial property forms a link between your long-term financial security and the short- to medium-term success of your business.
When thinking of borrowing from your pension also consider the alternatives, such as a bank loan, extending the business overdraft or using your own funds. And always seek the advice of an Independent Financial Adviser (IFA) before committing to a decision.
Buying a commercial property in your pension, or borrowing money from a SSAS, can be complex. You’ll need either a SSAS or a SIPP and the one you choose will depend on the type of borrowing or lending required, plus a range of other factors.
Here at First Wealth, our expert financial planners are on hand to help you decide the right option for you. As Chartered Financial Planners you can rely on us to have the technical expertise you need to help guide you through the complex maze of SIPP and SSAS options.
We will discuss the suitability of both a SIPP and a SSAS, help you understand the impact of pension borrowing on your long-term financial plan and consider other options that could allow you to support your business.
We’ll also consider how using a SIPP or SSAS would affect other areas of your finances including Inheritance Tax (IHT) planning and the impact on your Lifetime Allowance.
Finally, if we advise you to proceed, we will liaise with your accountants and solicitors to ensure the transaction proceeds smoothly.
If you’d like to discuss any aspect of borrowing from your pension or business financial planning, please get in touch.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.
This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.