In financially uncertain times, business owners might be tempted to borrow from their pension to help their business.

Both Self-Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSASs) can be used to help purchase business premises or other commercial property but strict rules apply.

It can be a tax-efficient way to help a business but is it a good idea for clients to tie the success of their company to their potential income in retirement? What are the rules? And what can the borrowed money be used for?

As the current Moneyfacts Retirement Planner of the Year, we can help your clients to answer some of these questions.

Using a SIPP

Your clients can’t use a SIPP to lend money directly to their business, or to any individual or company linked to that business. But a SIPP can borrow money which can then be used to purchase commercial property.

A SIPP can borrow up to 50% of its value which can be used to purchase a business’s commercial property. The property is leased back to the business and all rent is payable into the pension and used to repay the borrowing. This is tax-efficient as well as providing the extra capital the business needs.

An additional benefit is that although rent must be charged at a commercial rate, it is tax-deductible as a business expense. Any growth in the value of the property is owned by the pension and therefore there is no Capital Gains Tax (CGT) to pay.

It is usually possible to buy or invest in any property whose primary use is commercial.

Using a SSAS

As a type of company pension, a SSAS has a sponsoring employer and therefore, unlike a SIPP, it can be used to lend money to your client’s business.

Strict rules apply to SSAS loans and tax charges apply if any of the following tests are not satisfied:

  • The loan must not exceed 50% of the pension’s net value – If the pension is worth £500,000 for example, the maximum amount that can be borrowed is £250,000.
  • The loan must be secured as a first charge – the asset does not need to be owned by the sponsoring employer but, at the time of the loan, the security must be of at least equal value to the amount that is lent plus interest payable on the loan. Often, company premises will be used as an asset. That can be risky. If the business defaults on the loan, the commercial property could be sold.
  • Interest must be charged at a commercial rate – the interest rate is selected by the scheme members but must be a ‘commercial rate,’ defined as 1% above the Average Base Rate of the six leading high-street banks: the Bank of Scotland, Barclays, HSBC, Lloyds, NatWest, and RBS. In practice, HMRC dictates the level of interest to be charged.
  • The loan term must be five years or less – If at the end of the term the outstanding balance has not been paid, it might be possible to rollover the outstanding amount (plus interest) for a further five years. This can only be done once and will not be treated as a new loan.
  • Loan repayments must be paid in equal instalments – loans to a sponsoring employer must be repaid in equal instalments of capital and interest, payable at least annually.

A loan that fails to meet any of these five tests will be deemed an unauthorised payment and become subject to tax charges.

A SSAS can be used to help purchase the commercial property of a client’s business in the same way that a SIPP can.

As with SIPP borrowing, it is possible to borrow up to 50% of a SSAS’s value. The property is leased back to the business, with rent payable into the pension. Rent must be charged at a commercial rate but is tax-deductible as a business expense.

Seeking advice

Your client’s pension plan is designed to provide them with an income throughout their retirement. Forming a link between their financial security and the success of their business isn’t without risk.

There are alternatives such as bank loans, extending a business’s overdraft, or using personal funds. A client should always seek professional financial advice before making a final decision.

Get in touch

If you have any clients that are interested in talking to us about using their pension to aid their business, please get in touch with us. Email or call 0116 2407070.