SIPP Transactions: Buying, Selling and Financing

A Self-Invested Personal Pension (SIPP) is a form of UK personal pension that gives individuals greater control over their investments. Unlike many workplace or standard personal pensions, a SIPP provides access to a wider range of investments, including, among other things, real estate.

Contributions to a SIPP may benefit from tax relief, subject to the individual's circumstances and the applicable tax legislation, making them particularly attractive in recent years. SIPPs can be managed personally or with professional advice and are often used alongside workplace pensions or to consolidate existing pension pots.

SIPPs typically appeal to business owners, as they can be used as an investment-acquiring vehicle. They are also popular with individuals who want greater flexibility over their investments and those with larger pension pots.

At Leathes Prior, we frequently assist business owners utilising their SIPPs to facilitate transactions and plan for succession, and so are well versed in what to expect should you find yourself embarking on a similar venture.

Lending funds to a SIPP

A SIPP may borrow money, for example, where an investment opportunity has become available but the SIPP does not currently have the funds to explore it. The maximum amount a SIPP can borrow is 50% of its net fund value immediately before the borrowing takes place. Where the SIPP already has borrowing in place, any existing borrowing will be taken into account.

For example, if your SIPP have a value of £500,000 and has already borrowed £100,000, the largest single borrowing the SIPP could undertake would be £200,000 (i.e. 0.5 x (£500,000 – £100,000)).

Typically, SIPP providers require that loans are made on ‘standard commercial terms’, which in our experience usually means putting in place a tightly drafted loan agreement and, potentially, security over the relevant investment being acquired by the SIPP. As such, it is important that the legal documentation relating to the facility is carefully prepared to ensure a quick and smooth turnaround (particularly where the investment is time-sensitive).

Borrowing funds from a SIPP

As noted above, SIPPs are commonly used for investment purposes. In certain circumstances, they may also lend, although the rules governing such lending are strict.

Where a SIPP seeks to lend money, strict rules apply – SIPPs cannot lend money to the individual who invests into them, nor can they lend to a connected party, such as a spouse, family member or a company controlled by the individual. SIPPs also cannot be used as security or collateral for a loan to a member or connected party. In the event a SIPP lends money to a connected party, HMRC could consider this an unauthorised payment, which could result in significant tax penalties.

SIPPs can, however, lend to an unconnected third party on ‘standard commercial terms’, provided the arrangement represents a genuine investment for the benefit of the SIPP. In such cases, your SIPP provider will need to be satisfied that the proposed loan constitutes a suitable investment for the SIPP and that appropriate consideration has been given to matters such as the borrower's financial position, the interest rate, repayment terms and any security being offered.

Accordingly, the loan agreement will need to be bespoke in order to reflect balanced commercial terms, as well as to meet the regulatory requirements for the SIPP.

If you require advice in relation to a SIPP transaction or the associated legal documentation, please do not hesitate to contact Leathes Prior’s Corporate and Commercial Team on 01603 610911 or at info@leathesprior.co.uk.