Pension Scheme Borrowing

Pension Scheme Borrowing

Many people aren’t aware that you can borrow through your SIPP (self-invested personal pension) or SASS (small self-administered scheme) when purchasing or financing Commercial or Semi-Commercial Property.

Borrowing through your pension scheme can be a very efficient and valuable way to purchase and finance commercial property, whether for your own trading business or investment. However before deciding to progress with any such application, it is important to fully understand the criteria available and also take suitable tax advice on the implications of your plans.

Saving to buy a house

Key Points

Not all lenders support borrowing through a pension, therefore it is important to work with a specialist broker who understands the terms available from the whole of the market.

Debt is available up to 80% loan to property value for where the pension owner’s trading business will be the tenant (100% in certain specific sectors) or 75% loan to property value for investment purposes.

This is however subject to certain legal limitations such as the borrowing being no more than 50% of the value of the fund. Please see below for more details.

Borrowing through a pension is only for commercial property; the tax implications of holding residential property in such a fund are punitive and undermine any of the commercial benefits of doing so – every potential borrower should take appropriate advice from their tax professional and pension scheme manager/administrator.

Where you already own a commercial trading or investment property, borrowing through your pension could allow purchase of that property from you/your business and can potentially be similarly tax efficient.

How much can my Pension Fund borrow?

The pension scheme can effectively borrow up to a maximum of 50% of the fund value. Any debt secured will be restricted to no more than 50% of the fund value irrespective of the loan to value or the value of the property being financed.

The funding amount available is also limited against the property value as with any standard mortgage transaction, maximum debt being dependant on the respective Lender’s criteria for that specific asset or business class and the serviceability demonstrable from trading accounts of the pension scheme owner’s business or 3rd party rental income respectively.

One point which is important to note for all property purchases into the pension fund, the value of fund used for the 50% calculation is that in place before the value of the new property is considered, i.e. if the pension fund is valued at £200k and the property to be purchased is £400k, the pension fund can borrow a maximum of £100k.

What does this look like in reality?

Case Study 1

Trading business currently rent their premises and wish to purchase a unit in which to move their business and trade from. The husband and wife owners of the business wish to buy the property in their pension schemes and rent the asset back to their business.

Pension Fund(s) Value: £200,000

Commercial Property to be purchased: £300,000

Facility available from the Bank: 80% of the asset value = £240,000 however this is limited to 50% of fund value, therefore £100,000

Purchase of £300,000 met through £200,000 held in the pension fund and £100,000 commercial mortgage.

Case Study 2

IFA firm own and occupy their office premises, the asset held in the limited company name. Under suitable tax advice, the shareholders decide to move the asset into their pension scheme, releasing funds back into the company balance sheet to be reinvested and hold the commercial property in a tax efficient manner, also providing future rental income from the lease to be put in place between their pension scheme and the trading company.

Pension Fund(s) Value: £500,000

Commercial Property to be purchased: £300,000

Facility available from the Bank: 80% of the asset value = £240,000 This is limited to 50% of fund value, £250,000, therefore a commercial mortgage of £240,000 is available

Purchase of £300,000 met through £60,000 held in the pension fund and £240,000 commercial mortgage.