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Pensions: Amps scores a loan victory for Sipp investors

Lobbying by the Association of Member-Director Pension Schemes has secured relaxation of Sipp fund borrowing rules, which can open up opportunities for investors eyeing commercial property bargains, writes Ian Westwater at James Hay.

Graeme was feeling quite pleased with himself as he sat opposite his IFA, Torquil Farquhar-Smythe. He had played five-a-side last night and, although his side had lost by one goal, he had scored three and had played well (even if he did say so himself). Better still, unusually he had no bruises, pulled muscles nor pain from his long-suffering back.

‘You should have seen my second goal, Torquil,’ he said. ‘Ronaldo would have been proud of it. Anyway that’s enough about my sporting prowess. Let’s talk about the credit crunch.’

He continued: ‘While I fully sympathise with those businesses that are going bust, on the plus side properties can be purchased for a fraction of the prices we could have paid two years ago. Take in to account current low interest rates and now would be a perfect time to invest more of my Sipp fund in commercial property.’

The wrong calculations

Graeme took out a sheet of paper from his briefcase and passed it to Torquil, explaining that he had calculated how much he had available in his scheme for the investment and how much borrowing he could obtain from the bank, based on the HMRC limit of 50% of the fund value.

His calculations were as follows: 

  • Current Sipp fund value (including property valued at £1m) – £1,350,000
  • Fund available for investment – £350,000
  • Maximum borrowing (50%) – £675,000
  • Less existing mortgage – £600,000
  • New borrowing – £75,000
  • Maximum property purchase – £425,000

‘I know of at least three properties that I could buy for around £425,000,’ said Graeme.

Torquil looked at the figures on the sheet of paper and smiled, smugly. It was a smile Graeme had seen often and he realised that Torquil had spotted an error in his calculations.

The right calculations

‘I am afraid your calculations are wrong, Graeme. The maximum borrowing is 50% of the net fund value so, effectively, you have to deduct the existing borrowing twice.’

As he spoke, he jotted down the following:

  • Current Sipp fund value – £1,350,000
  • Less existing borrowing – £600,000
  • Net Sipp fund value – £750,000
  • Maximum borrowing – £375,000
  • Less existing borrowing – £600,000
  • New borrowing – nil

Graeme was deflated, but soon regained his composure.‘Oh well, I still have £350,000 to play with. I’ll just have to lower my sights a little. Anyway, that was just part of my cunning plan. With interest rates so low I think we should negotiate a new rate with the bank for the existing mortgage.

‘When we arranged the mortgage, three years ago, the rate was set at 6.5% but I reckon we could reduce that to around 4%. I thought that, if I continue with the same payments, I could repay the loan earlier.’

‘Excellent idea, Graeme, and your timing could not be better,’ said Torquil. ‘The Association of
Member-Directed Pension Schemes (Amps) has just announced that HMRC has agreed an easement that, provided borrowing is not increased, would allow remortgaging or restructuring of a loan without the loan having to be tested against the current maximum borrowing limit.’

Torquil explained that, when pensions simplification was introduced in April 2006, the maximum borrowing limit for a Sipp was changed from 75% of the purchase price of the property to 50% of the net fund value. He also explained that, although legislation allowed existing borrowing to continue, prior to this easement, if a new loan agreement was completed this would be looked on as new borrowing and the loan would be tested against the new limits.

Chargeable payment

In Graeme’s case the current maximum borrowing limit is £375,000. The current loan would exceed the maximum borrowing by £225,000 (£600,000 less £375,000) and this amount would be treated as a scheme chargeable payment, giving rise to a tax charge of £90,000 (40%).

Torquil continued: ‘HMRC took the view that where trustees wish to restructure existing borrowing, even for a change in interest rates with the same lender, if it required an amendment to an existing borrowing agreement resulting in new documentation it would be treated as new borrowing and would be re-tested against the maximum.

‘One solution would have been for someone to challenge HMRC’s interpretation of the legislation in the law courts but that could have taken years. Happily Amps, with others in the pensions industry, have successfully canvassed HMRC, which has agreed to relax its approach.’

‘Yes!’ said Graeme and began running around the room with his hands held high in celebration.

Torquil picked up a sheet of paper from his desk and threw it at him. Graeme took the paper ball on his chest, allowed it to drop to his right foot and lobbed it into Torquil’s waste paper basket.

Unfortunately he caught his foot in the lining of his coat and landed in a heap on the floor. ‘Oh no! I’ve done my back again,’ he groaned.

Torquil helped Graeme to his feet and watched as he gingerly straightened his back. ‘Never mind, Graeme,’ he said ‘Let’s go to the State Bar for lunch and I’ll treat you to a pint and steak pie and chips.’

‘OK,’ said Graeme. ‘But I’ll just have a mineral water and a bowl of soup. I’ve reserved a table at Rogano’s for dinner tonight with my wife and daughters and I would not want to spoil my appetite.’

‘Wimp,’ said Torquil under his breath.

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