Frequently Asked Questions (FAQ)

The maximum amount that any scheme can borrow will be 50% of the current value of the scheme, less any outstanding loans. 100% of scheme assets plus any scheme borrowings can be used to purchase an asset e.g. the scheme could purchase an asset worth 150% of the current value of the scheme.

Does the money that is borrowed have to be used to buy a commercial property?

No, it could be used to buy other assets e.g. stocks and shares or to make a loanback to the principal employer (occupational pension schemes only).

What type of scheme can borrow money?

Assuming the scheme rules allow it, any registered pension scheme will be able to borrow money.

What is the maximum loan amount?

Up to 50% of the market value of the scheme can be used. The loan must not be granted for more than 5 years, but under certain circumstances the loan can be extended by up to 5 years.

If a loan was granted before A-Day and the terms are changed after A-Day, the whole loan will be subject to the new rules.

What rate of interest must be charged?

The interest rate will be the average of the base lending rates for the following banks plus 1%, rounded up to the nearest multiple of 1/4%:

The Bank of Scotland

Barclays Bank plc

HSBC plc

Lloyds TSB plc

National Westminster plc, and

The Royal Bank of Scotland plc.

How long can a loan be for?

A maximum term of 5 years, but under certain circumstances the loan can be extended by up to 5 years.

Can a loan be extended?

Under certain circumstances a loan can be extended by up to 5 years.

What can be used as security for a loan?

An asset worth at least the same value as the amount being lent, including interest. The pension scheme must have a first charge on this asset.

What happens if a loan was granted before A-Day?

If a loan was granted before A-Day and the terms are changed after A-Day, the whole loan will be subject to the new rules. Otherwise the loan can continue until the end of its term.

Can residential property be purchased?

No, with limited exceptions this will be a prohibited investment and if residential property is purchased the scheme may become de-registered which would result in a tax charge equal to 40% of the value of the scheme assets. On top of this there will be additional tax charges.

Can land be bought so that a property can be built on it?

Yes, as long as the property is commercial and not residential. Some exceptions for residential property are:

a piece of land that is having a house built on it as long as the land and house is disposed of before it becomes habitable
a commercial property that is being converted to a residential property provided that the property is disposed of before it becomes habitable
a property that is occupied by an employee who is neither a member of the pension scheme or connected to a member of the pension scheme and is required as a condition of employment to occupy the property e.g. a caretaker's flat
a property that is occupied by a person who is neither a member of the pension scheme or connected with a member of the pension scheme and the residential element of the property is used in connection with the commercial element as an investment of the pension scheme e.g. a flat above a shop that is leased from the scheme with the shop, where the flat is occupied by the shop keeper.

What type of pension scheme can buy commercial property?

As long as the scheme rules allow it, any type of registered pension scheme can purchase property.

How much rent needs to be paid?

Commercial rent will need to be paid. If somebody uses the property for personal use and commercial rent is not paid then HMRC will impose a tax charge on the member.

Can a property be leased by the scheme to the sponsoring employer?

Yes.

Who pays any stamp duty due?

The pension scheme pays the stamp duty.

Can a property be leased to an unconnected party?

Yes as long as commercial rent is paid. If somebody uses the property for personal use and commercial rent is not paid HMRC will impose a tax charge on the member.

Can commercial property be purchased overseas?

Yes. Clients looking to invest overseas should check what countries are allowed by their pension provider.

Can shares be an asset of a pension scheme?

Yes.

Can shares be bought from the scheme member?

Yes, as long as the shares were sold on a commercial basis.

Can shares be held in the sponsoring employer?

Yes, but there are restrictions.

Can a scheme borrow money to purchase shares?

Yes, money can be borrowed to purchase any type of scheme asset.

Can shares of the employer be an asset of a pension scheme?

Yes. Up to 5% of the fund value can be held in shares of the employer or an associated company.

Is there a maximum number of shares that a scheme can hold?

Up to 5% of the market value of the assets of the pension scheme can be held in shares of the employer or an associated company. There is no limit on the amount of shares that can be held in other companies. Where there is more than one sponsoring employer up to 20% of the market value of the assets of the pension scheme can be held in shares of these companies, subject to shares in any one of these employers not being more than 5%. These rules apply to occupational pension schemes. A personal pension scheme does not have a sponsoring employer, therefore the 5% limit that there is for occupational pension schemes does not apply. However a pension scheme cannot invest in taxable property. This means that a personal pension scheme cannot invest in an unquoted company as the assets of the unquoted company will be regarded as taxable property.

Can any type of registered pension scheme hold shares of an employer?

Yes, as long as the scheme rules allow this type of investment.

What are the ‘connected party’ rules?

Where a transaction takes place between a scheme and a connected party in either of the 3 categories below the transaction must be done at arm's length or it may create an unauthorised payment.

Category A Transactions
A transaction between the scheme and the member or the sponsoring employer.

Category B Tranactions
A transaction between the scheme and the people connected with members and/or connected employers. Connected for this purpose means anyone who falls within the definition below:

People connected to the member:

the individual's spouse or civil partner
a relative of the individual
the spouse or civil partner of a relative of the individual
a relative of the individual's spouse or civil partner
the spouse or civil partner of a relative of the individuals spouse or civil partner.

Category C Transactions
A transaction between the scheme and a third party, which is directly or indirectly for the benefit of a member or sponsoring employer.

A company is connected with a person if that person has control of it, or if that person and the persons connected with him together have control of it.

An arms length transaction is one done on normal commercial terms.

Is a Pensioneer Trustee required for any kind of scheme?

It is no longer a HMRC requirement to have a Pensioneer Trustee, and tax relief will not be conditional on the appointment or continued presence of such a Trustee.

What are the new rules on value stripping assets?

The new rules discourage schemes from investing in assets that are designed to remove value from tax-privileged funds. These rules will:

provide that all investments must be acquired, disposed of or leased on commercial terms
prevent the use of investments and changes to investments that allow for value to be taken out of scheme assets
prevent the use of annuities which provide that certain payments can be made directly or indirectly on the death of members, and
provide that all loans to third parties must be on normal commercial terms.