If you contribute to a self-invested personal pension (SIPP), you may be interested in finding out the valuable benefit of being able to borrow from it, either now or in later years before you’re ready to retire. After all, when you want to buy commercial property – for your own business use or to rent to others – SIPP borrowing is a very handy way to raise the funds you need.
However, before you do so, it’s important to understand the SIPP borrowing limits. Prior to 2006, SIPPs were able to borrow up to 75% of the value of any commercial property, From 2006, SIPP pension borrowing was reduced to 50% of the value of the fund: which is why it’s generally known as SIPP 50.
In this short article, we’ll be covering topics including:
- Can you borrow against a self-invested personal pension?
- Can I borrow?
- How much can a SIPP borrow?
- A borrowing example
- Speak to a pensions expert
And if you want the answers to any other complex questions about SIPP 50 borrowing, the experts we work with are always happy to help – make an enquiry to speak with them today.
Can I borrow against a self-invested personal pension?
Yes, the beauty of a self-invested personal pension is the wide variety of asset classes you can use it to invest in, and where you want to invest in commercial property, your SIPP can be a valuable asset since it can be used to take out a mortgage loan.
Bear in mind though that SIPP borrowing is only for commercial property; because if you put residential property into your SIPP, HMRC will be entitled to hit you with a tax bill for a punitive 55% of the total investment.
If you already own commercial property, SIPP borrowing allows you to effectively buy it from your business and can potentially be tax-efficient. Using your SIPP to buy commercial property for rent is also a popular way to go.
SIPP pension borrowing can also be used to invest in a commercial property fund, which is a common route largely because it is the simplest way to invest your SIPP borrowing.
Can I borrow from my SIPP?
A SIPP is a Self-Invested Personal Pension, and therefore it cannot lend money to you or your business or anyone directly related to you. There is a common misconception that you can borrow from a SIPP. That’s possibly because pension funds are able to lend to a Sponsoring Employer.
However, if you have a Small Self Administered Scheme (SSAS), there is a Sponsoring Employer and therefore the SASS can lend money to the employer in question.
What you can also do, of course, is simply withdraw money from your SIPP when you retire, as long as you are 55 or older. The first 25% you take will be tax-free, and any further withdrawals will be treated as taxable income.
How much can a SIPP borrow?
The SIPP 50 rule that has been applied since 2006 means that while you are allowed to borrow as much as 75% of the property value, the maximum loan to value will be 50% of your current SIPP value.
So if the value of your self-invested personal pension is £200,000, the mortgage amount will be limited to £100,000.
This needn’t be a problem, even if the premises are worth more than this, or whether you want to operate from the property or rent it to another business, as we demonstrate in the example below.
A SIPP borrowing example
Let’s assume that you’d like to purchase business premises – which may or may not be those you currently trade from – valued at £300,000, using your SIPP, which is valued at £200k.
- SIPP Value: £200,000
- 50% of which is £100,000.
A lender might therefore contribute the additional £100k as a SIPP loan to make up the £300k purchase price.
The main stipulation to this particular SIPP borrowing would probably be that a lease is put in place to pay an agreed monthly rental over a 10-year repayment period: either with your business or another tenant.
At the end of 10 years, your SIPP would own the property outright, which would in all probability have appreciated. All future rental income would also be paid into the SIPP wrapper absolutely tax-free.
Furthermore, there would be no income tax to pay on any of the rents received at any time, and no Capital Gains Tax (CGT) on the eventual sale of the property.
Talk to a pensions expert today
If you’re interested in using a SIPP loan to purchase a commercial property, call us today on 0808 189 0463 or make an enquiry here.
Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.