Borrowing Rules for SIPP Holders

Investing into a self-invested personal pension (SIPP) has many advantages, including the lesser-known benefit of borrowing against its value to make larger investments that are potentially more profitable (usually by buying commercial property).

Naturally, there are rules in place to ensure that this system is only used as HMRC intends it to be. We’ll give you an overview of those rules here so you can decide whether this is a route you’d like to pursue.

Can a SIPP borrow money?

Yes, you’re allowed to borrow money within your SIPP and use that loan to make any legitimate investment that’s intended to increase your retirement savings.

The most common reasons for borrowing are:

• To buy a commercial property (owning residential property through a SIPP is forbidden)
• To fund maintenance or renovation of a commercial property owned by the SIPP

Your SIPP is used as partial security against the loan. For example, if you were to use the loan to buy a commercial property, you would likely be planning to make repayments from the rental income of that property. But, if the rental income doesn’t fully cover the repayments, the lender could claim the shortfall from your retirement savings.

How much can a SIPP borrow?

You can borrow up to 50% of the net value of your fund, i.e. if your SIPP is worth £100,000, you can borrow £50,000. Of course, your SIPP fund can fluctuate all the time, but what matters is the value at the moment you take out the loan.

You need to be very careful to stay within the borrowing limit. If you exceed it, the excess will be viewed as an unauthorised payment, meaning you’ll pay a tax charge of at least 40% with the potential for this to rise to 55%. The scheme administrator will also be subject to a scheme sanction charge of up to 40%. This is easy to avoid if you only take out one loan but becomes more complex if you take out several at different times, as the value of your SIPP is always changing.

SIPP lending rules

As you might expect, HMRC has plenty of rules around SIPP lending and borrowing. Here are some of the main ones:

• You cannot personally borrow money from your SIPP
• Your SIPP cannot loan money to a ‘connected person’, e.g. a spouse or family member
• Nor can it lend to a ‘connected company’ i.e. one you are a director of
• It cannot be used as collateral for a loan to you or a connected person or company
• Your SIPP can borrow from anyone, but only on standard commercial terms

SIPP regulation is too complex to cover here entirely so, to be sure you’re following all the rules, you should look to speak with a pensions advisor who has experience in this area.

What are the advantages of borrowing through a SIPP?

There are various advantages to borrowing money through a SIPP to buy commercial property, such as:

• Getting a loan will enable you to buy a more valuable property
• The loan repayments can be made from the rental income, which the SIPP receives without incurring income tax
• Once the loan is repaid, the SIPP will own this property outright
• All later rental income will go directly to the SIPP – still free from income tax – increasing its value
• If the property increases in value over the term of the loan, your SIPP will be more valuable
• If you eventually sell the property, the proceeds will be paid into your SIPP without incurring capital gains tax

So, if you make a good investment, borrowing within your SIPP can help you grow your retirement savings faster. If your investment turns out to be a bad one, your retirement savings could take a hit.

How commercial property purchases are calculated

As you’re allowed to borrow up to 50% of your net SIPP value, you’ll be able to buy a property that costs 1.5 times your current net SIPP value.

For example, let’s say:

• Your SIPP is worth £200,000
• You can, therefore, borrow £100,000
• You can buy a commercial property worth £300,000

This example disregards other costs, such as legal fees. If you want, you can also pay for these from the funds in your SIPP, which would leave you with less to buy a property. For example, if the fees totalled £10,000, you could buy a property worth £290,000.

You don’t necessarily have to use all the funds in your SIPP to buy the property, though, and you’re free to borrow less than 50% of the SIPP value. Many lenders will provide a 70% loan-to-value (LTV) commercial mortgage.

So, if you were to borrow on these terms, let’s say:

• Your SIPP has a net worth of £200,000
• You could borrow up to £100,000, but decide to borrow £70,000
• You use £30,000 of your SIPP value as the mortgage deposit
• You can buy a commercial property worth £100,000
• You pay fees of £5,000 from your SIPP
• You’re left with £165,000 in your SIPP to invest in other assets

How much you choose to invest into commercial property vs other assets will depend on your individual circumstances, so you should seek advice from a regulated financial advisor.

You’ll want to discuss with an expert:

• Why you want to buy a commercial property (often, it’s to operate your own business from)
• What type of property would be suitable and how much it will cost
• What you’re trying to achieve by investing in property (as well as investment growth, you may want to benefit from the tax advantages this arrangement provides)
• How much you can expect your SIPP value to grow over time based on the rental income of the property
• How this compares to other investments you could make