Our Banking lawyers explore the key considerations when refinancing commercial property held within a Self-Invested Personal Pension (SIPP), including regulatory requirements, lending constraints and practical issues that trustees and members need to be aware of.
Why Hold and Refinance Commercial Property in a SIPP
Holding a commercial property in a Self-Invested Personal Pension (SIPP) offers certain advantages.
Rental income is generally exempt from income tax, and any capital gains on the disposal of property held in a SIPP are also usually tax-free. As a result, holding commercial properties in a SIPP is quite common.
SIPP trustees and members may consider refinancing the property to release capital, improve cash flow or secure more favourable lending terms.
Refinancing may also be necessary when the term of an existing loan is coming to an end.
Refinancing a property owned by a SIPP is very similar to any other refinancing, with a couple of additional considerations to ensure that the refinancing complies with the regulations governing pension schemes.
Borrowing Limits and Regulatory Considerations
It is possible to obtain funding for the purchase of commercial properties in a SIPP, provided that the SIPP does not borrow more than 50% of its net assets.
This is also the case when it comes to refinancing a property held in a SIPP, meaning that the refinancing needs to be carefully structured to ensure the SIPP stays within borrowing limits.
There are also practical considerations where the SIPP member or a connected business occupies the property.
Connected party transactions are permitted under pension legislation, but they must be conducted on fully commercial terms on an “arm’s length” basis.
Rent must reflect market value, and the lease must be on acceptable commercial terms. The refinancing must not confer an improper benefit on the member or any associated party.
Legal Due Diligence and Lender Requirements
The usual due diligence process will need to be dealt with to refinance the property.
The lender will conduct a valuation of the property and will instruct a solicitor to carry out the legal due diligence.
This will include reviewing the title to the property, reviewing and reporting on any occupational tenancies and making sure documents such as the Energy Performance Certificate, building insurance policy, and asbestos survey report are up to date.
If the SIPP is refinancing with a different lender, the lender will normally require the usual property searches to be conducted, such as a local authority search, highways search and desktop environmental search.
If the refinance is with the same lender, they may waive this requirement and accept an indemnity insurance policy for no searches instead.
The lender will require a legal charge over the property as security for the loan.
When it comes to signing the security documents, it should be remembered that the pension fund administrator may take a few days to do this, as they often have internal checks before signing documents, and only specific people at the administrator are authorised to sign.
Most lenders still require wet-ink signatures rather than electronic signatures.
The Importance of Specialist Advice
Refinancing commercial property through a SIPP needs to be structured correctly and is not a straightforward exercise.
The interplay between pension regulations, property law and lender requirements means that early legal advice is crucial.
An experienced solicitor can help ensure compliance and protect the trustees’ position.
Contact Our Banking Lawyers
We can help ensure your refinancing is compliant, efficient and aligned with your long-term investment goals.
0161 941 4000
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Charlotte Hook
Senior Associate
Charlotte is a senior associate in the Real Estate team at Myerson. She trained at Myerson and qualified in September 2017. Charlotte has been recognised in the Legal 500 several times as a “Rising Star” and a “Leading Associate”.
Charlotte specialises in sales and purchases, landlord and tenant work and secured lending matters. She has acted for both sellers and purchasers on various types of properties including offices, retail units, industrial units and land for development. Charlotte has expertise in negotiating conditional contracts, option agreements and overage provisions.
About Charlotte Hook