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The legal process for the purchase of a commercial property by a SIPP or a SSAS does not differ from the process involved when acting for a company or an individual.
There are, however, a couple of specific points which we need to consider to allow the transaction to run smoothly.
Connected party transactions
Conflicts of interest can particularly arise in connected party transactions which involve the member themselves in the case of a SIPP, or the sponsoring or principal employer in the case of a SSAS, and any person connected with them, such as a spouse or relative. In connected party transactions, the following things should be noted:
Loans and borrowing
SIPPs and SSASs can borrow to buy a commercial property, but the maximum amount that can be borrowed by either a SIPP or a SSAS is 50% of the net asset value of the scheme (i.e. the value of its assets less any liabilities including the balance on any existing loans) at the time the loan is entered into. This applies to loans from a commercial lender as well as from a member or any connected party. In the latter case, HMRC requires the loan to be on commercial terms with an appropriate rate of interest equivalent to that of a commercial lender.
Valuing net assets can present a problem where the amount to be borrowed is at, or is close to, the 50% maximum. This is because the net scheme asset value could reduce between the time of commencing discussions with the lender and actually drawing down the loan some weeks later. If this happens, the 50% borrowing agreed at the outset will not reflect the net scheme asset value at drawdown, resulting in unauthorised borrowing which will be subject to a tax charge.
A lender agrees to give a maximum loan of £500,000 based on net scheme assets of £1,000,000. On drawdown some weeks later, the net scheme assets are valued at £950,000 due to a fall in market prices. The maximum loan now is £475,000 meaning that there is unauthorised borrowing of £25,000 and a tax charge would be payable. It is important to bear in mind and take account of potential changes to asset values to avoid instances of unauthorised borrowing.
Any calculation of finance needed should take account of any VAT and stamp duty payable, as well as legal and other costs as a SIPP and SSAS can no longer borrow a separate amount in excess of the limits on borrowing when purchasing or developing a property.
In terms of SIPPs or SSASs making loans to others, SIPPs are permitted to make loans to a third party but not to either the scheme member or a connected party. SSASs on the other hand can make a loan to a sponsoring or principal employer subject to compliance with HMRC requirements.