SIPP case study: Alternative to bank financing for property purchase
Elaine Turtle, Director, DP Pensions presents a case study where the refusal of a bank loan for the purchase of a business premises was enabled through alternative financing via SIPP borrowing
SIPPs and SSASs are able to borrow up to 50% of their net fund value – but since the banking crisis obtaining bank funding can be difficult and not everyone realises that the funds do not have to come from a bank. Here is a case study that might be of interest to you.
Ed Green had a SIPP, which he had set up in order to purchase premises for his business. His business had been running for 10 years and had grown substantially over the last three years and the space he needed for his staff and stock meant he was now looking for new premises.
Ed had a good relationship with the bank – the company had never actually needed to borrow from the bank for many years and the company had made a steadily increasing profit each year.
So Ed eventually found the right premises after six months of looking – firstly he had realised that the property was going to cost more than he had originally thought and even with borrowing of 50% of his fund he did not have enough funds in his SIPP despite having had made the maximum contributions for the tax years to date.
His wife, (Jane), who was involved in the business had a personal pension plan and it was agreed to transfer this into a SIPP which would help boost the total funds so that, plus borrowing, would mean that they had enough to purchase the property and pay for all the costs relating to the purchase.
With the figures completed by his SIPP provider, Ed approached his bank. His local branch had to take this up with their lending department and after a number of weeks they came back and stated that currently they did not want to lend to either Ed, his and his wife’s SIPPs or his business. Ed was very surprised given the loan to value and would have thought that the bank would have lent the money with no issues. Ed’s adviser informed him that he was not the first client who had been turned down by their bank and it was not an unusual occurrence, this just seemed to be the position with banks being very careful and limiting the lending they were prepared to allow.
Ed now thought that he would not be able to proceed with the purchase. His company was not in a position to lend funds to his and his wife’s SIPPs as they had been making large contributions with any monies left each year in the company.
Alternative lender via the SIPP
His father when he heard what had happened with the bank offered to help. At first Ed could only see his father helping by purchasing the property jointly along with the SIPPs. As his father was 68, his father did not actually want to purchase part of the property and on chatting this over with his adviser and his SIPP provider, they suggested that his father could actually be the lender to the SIPPs.
Ed had been unaware that this was possible. His SIPP provider stated that anyone can lend to a SIPP – if it is a connected party then it has to be on commercial terms. The SIPP provider would need a letter from the bank stating the terms on which they would lend funds had they been prepared to lend. These terms could be matched against the terms applying to any borrowing Ed’s father.
Ed obtained the letter from the bank and his solicitor acting for the SIPPs drew up a facility letter matching these terms. The security on the mortgage was the same property the SIPPs were purchasing. This was fine, as again this is what the bank would have required. One advantage was that if Ed and his wife Jane wanted their SIPP to overpay on the mortgage payments they could do this as and when they liked, no going back and forth to the bank’s legal department.
The rent had to be paid based on the independent valuation that had been prepared for the SIPPs as the tenant was a connected party. This rent was more than the payment to be made to the lender (Ed’s father) and Ed and Jane agreed with their SIPP provider that every six months the build-up of rent over mortgage payments would be paid over to Ed’s father as a chunk off the mortgage. If the company was still in a position each year to make contributions these funds again would help reduce the mortgage even further so, in fact, the borrowing would be paid off much earlier than the term put in place.
Ed’s father was getting a good return on his monies – more than he could receive with the funds sitting in his bank – he was helping his son, which pleased him and he would be getting a regular return each month through the mortgage repayment.
It is worth noting that HMRC only limit the amount of borrowing and not where the funds come from including third parties. However if the borrowing is connected then it must be on arm’s length commercial terms with the terms evidenced by a bank confirming the terms they would use for the lending being offered.
We hope this has helped demonstrate an alternative to bank financing that was of benefit to the SIPP members, their company and another family member. Had the bank agreed to the financing the members may not have considered what turned out to be a much better and savvier solution for all concerned.
Visit the DP Pensions website