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Investment Rules

There is only one set of investment rules for all pension schemes. This means that small self-administered schemes (SSASs) and self-invested personal pensions (SIPPs) are covered by the same set of HM Revenue and Customs (HMRC) rules along with all other types of pension.

Special case: An investment held before 6 April 2006 is still subject to the rules in force when it was entered into and is not affected by the post-6 April 2006 rules.

Trustee's borrowings in summary
Trustees of pension schemes can borrow money, provided it is used to benefit the pension scheme. They are limited to 50% of the net value of the pension (the value of the pension less and other liabilities). Other than this limitation rule. The terms on which trustees can borrow are set by the Lender including interest rate security, term etc

PTM12400: Investments: borrowing 

What can this Loan be used for?
This money can be used by the Scheme Trustees for any benefit but because the terms of the loan are set by the Lender the loan is usually used to enable the Trustees to:

• buy commercial property (subject to the commercial terms and security required)
• make a loan back to the principal employer (SSAS only)
• buy shares (in limited circumstances)

Who can the lend to the Trustees?
Trustees can borrow from pretty much anyone:

• Individual or individuals – If borrowing from a connected party then particular care must be taken
• Another Pension Scheme or Schemes
• A Company
• A Financial institution
• If the money is borrowed from a connected party (see later), the loan has to be made on commercial terms.

How much can the Trustees borrow (a bit more detail)?
The maximum amount that the Trustees can borrow is 50% of the current value of the scheme.

The 50% limit is the total amount that a scheme can borrow. There is no separate limit for any associated costs involved in the purchase of the asset for example

• Solicitor Fees
• Broker Fees
• Valuations
• Value Added Tax - on commercial property purchases VAT must be included within the overall 50% amount even though it is likely to be repaid within a few months of the purchase.

This means that 100% of scheme assets plus any scheme borrowings can be used to buy an asset. This means that the scheme could buy an asset worth 150% of the current value of the scheme. However, Trustee should remember that if there is no liquidity in the scheme and the entire borrowing has been taken up then an unforeseen bill such as National Non-domestic Rates charged to the Landlord in a void could push the scheme into insolvency which would result in personal liabilities to the Trustees and or potential tax charges.

What if there are already Scheme Liabilities?
The maximum amount that the Trustees can borrow is 50% of the current value of the scheme less any outstanding loans. The current value of the scheme can't include the current value of any existing borrowings/liabilities, such as:

• Pre-existing loans
• Undischarged Scheme debts – unpaid fees, penalties, tax due etc
• Asset related debts – interest accrued but not paid, Rates owed to a local authority, unpaid professional fees

The current value of the registered pension scheme is £600,000 with outstanding borrowings of £100,000.

The maximum amount of additional borrowings can't be more than £150,000. Calculations are below:

(Current value - existing loan) x 50% - existing loan = Allowed borrowing
(£600,000 - £100,000) = £500,000 
£500,000 x 50% = £250,000 
£250,000 - £100,000 = £150,000

How is the current value of the scheme calculated?
This is the market value of all assets (uncrystallised and crystallised) in the scheme. This can will also include dependants' scheme pension or income drawdown benefits.

Land and property
There are many advantages in a pension scheme owning property or land, including:

• Normally there will be no Inheritance Tax liability on the death on the Scheme Member as the pension assets are held in Trust (and the property is an asset of the scheme).
• The rent paid by the tenant is tax deductible as a business expense, and the rent received by the pension scheme helps to increase the retirement benefits.
• No Capital Gains Tax liability when the property is sold.

However, property is an illiquid asset and is likely to limit diversification of the pension fund assets. This means that without good quality tenants to generate income the scheme could run into difficulty and be forced to sell the property when it doesn’t want to.
PTM12500: Investments: taxable property

What type of property and land can a pension scheme purchase?
Commercial property, including:

• student accommodation
• care homes
• prisons
• shop
• offices
• overseas commercial property
• development land

PTM125200:Investments: taxable property 

What type of property can a pension scheme not invest in?
A pension scheme can't invest in most types of residential property, specifically:

• A building or structure that is used or suitable for use as a dwelling.
• Any related land that is wholly or partly the garden for the building or structure.
• Any related land that is wholly or partly grounds for the residential property and which is used or intended for use for a purpose connected with the enjoyment of the building.
• Any building or structure on any such related land.
• A beach hut.
• A property that also has a residential element (see some exemptions to this below).

PTM125200:Investments: taxable property 

What types of residential property can be bought by a pension scheme?
A pension scheme can't normally invest in residential property, but there are some exceptions. Examples of some of these exceptions 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 or shop keeper
• A home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disability, past or present dependence on alcohol or drugs or past or present mental disorder,
• A hospital or hospice,
• A prison or similar establishment,

PTM125200:Investments: taxable property 

Authorised Employer Loans (Loan Backs)
The Sponsoring Employer may borrow funds from the pension scheme - Loans to the employer is one way in which the pension scheme can be used to raise finance, whilst at the same time providing an investment return to the fund for the benefit of the pension scheme.

However, no loans can be paid to a scheme member or anybody connected to the scheme member.

PTM123000: Investments: loans 

Who can the money be lent to?
If the pension scheme is an occupational pension scheme the money can be lent to the sponsoring employer. There can be more than one sponsoring Employer attached to an Occupational Pension Scheme. It is a simple matter for a Scheme to adopt a Sponsoring Employer

PTM123000:Investments: loans 

How much can the scheme lend?
Up to 50% of the market value of the scheme can be used.

If the pension scheme is  an occupatioal pension and the money is lent to the sponsoring employer the loan should be for no more than 5 years. Under certain circumstances the loan can be extended by up to a further 5 years.

PTM123000:Investments: loans 

When can a loan be for more than 5 years?
If a loan is made to a sponsoring employer and that sponsoring employer gets into financial difficulty during the initial 5 year period, the loan may be rolled over for up to a further 5 years. This can only be done once.

PTM123200:Investments: loans: loans to sponsoring employers 

What would happen if the money was lent to a member or somebody connected to the member?
Any loan made by a registered pension scheme to:

• a person who is, or has been, a scheme member, or
• a person/company connected with the person who is, or has been, a scheme member

will result in an unauthorised payment equal to the amount of the loan; the charge will be:

• 40% of the amount of the unauthorised payment.
• In addition to this if the amount of the unauthorised payment exceeds 25% of the fund value there will also be a scheme payments surcharge of 15% bringing the total tax charge to 55%.
• A scheme sanction charge of 40% of the chargeable amount may also be levied on the scheme administrator.

A loan made by a registered pension scheme to a person/company connected with the person who is, or has been, a sponsoring employer will not result in an unauthorised payment in relation to the person who is, or has been, a sponsoring employer. This is provided the loan meets the same conditions as for loans to sponsoring employers generally (see PTM123200).

PTM123300:Investments: loans: loans to members and connected parties 

What security must there be for the loan?
The amount of the loan has to be secured throughout the term as a first charge on any asset owned by the person borrowing the money. This asset must be worth at least the same as the amount being lent plus the value of all the interest due over the term of the policy. If the asset that is being used as security is replaced by a new asset, the value of the new asset has to be at least equal to the value of the outstanding loan, including interest. In practice the security is likely to be a property.

PTM123200:Investments: loans: loans to sponsoring employers 

What interest must be charged?
The minimum interest rate a scheme can charge is calculated using the average of the base lending rates of the following 6 banks plus 1%, rounded up to the nearest multiple of ¼%:

• The Bank of Scotland plc
• Barclays Bank plc
• HSBC plc
• Lloyds Bank plc
• National Westminster Bank plc
• The Royal Bank of Scotland plc

All loans have to be repaid in equal instalments of capital and interest for each complete year of the loan.

PTM123000:Investments: Loans: Interest 

Stocks and shares
A pension scheme can purchase shares in any company, regardless of whether or not they are listed on a recognised stock exchange. An occupational pension scheme is however restricted in the amount of shares that it can purchase in the sponsoring employer or employers.

PTM122000: Investments: shares and equities 

What is the limit on the shares in the sponsoring employer (occupational pension scheme)?
Up to 5% of the fund value can be held in shares of the employer or an associated company. The Trustees can buy shares in more than one sponsoring employer of the scheme providing that at the time the shares are bought the market value of the shares is less than 20% of total value of the scheme. There is no restriction on the maximum percentage of shares that can be held in one company. For example a scheme could potentially own 100% of the shares of a company provided that the amount being invested is less than 5% of the fund value mentioned above.

PTM122000: Investments: shares and equities 

What happens if the scheme held shares in respect of the sponsoring employer(s) before 5 April 2006?
If an occupational pension scheme held shares in a sponsoring employer before 6 April 2006 the shares can continue to be held. If however, the scheme buys shares in a sponsoring employer after 6 April 2006 the 5% limit will apply and the total value of shares including the value of the shares held prior to 6 April 2006 will have to be taken into account.
PTM122000: Investments: shares and equities

What is the limit on the shares in the sponsoring employer (personal pension scheme)?
A personal pension scheme doesn't have a sponsoring employer, therefore the 5% limit that there is for occupational pension schemes doesn't apply.

Connected parties
Transactions between connected parties are not prohibited but if they do not take place on commercial, or 'arm’s length', terms, they are may give rise to an unauthorised payment. Where the transaction is done on a commercial basis and any valuations are made by suitably qualified valuers, this will reduce the chance that the transaction will be an unauthorised payment with the consequent tax charges. 

PTM027000:General principles: connected persons

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

Who is the sponsoring employer?
In relation to an occupational pension scheme this means the employer, whose employees benefit from the scheme.

What is an arms length transaction?
This is a normal commercial transaction that is done at the market rate between two or more parties.

What happens if this is not done at arms length?
Any transaction between connected parties has to be made at an arms length. If it's not done at arms length and as a result of this the member financially benefits the difference between the actual value and the arms length value will be taxed as an unauthorised payment. Scheme trustees should ensure that when a connected party transaction happens that they obtain an independent valuation and ensure that the market value is paid.
Other considerations

Personal use of assets
HMRC has stated that any non-commercial use of an asset by a member or an associate of a member will create an unauthorised payment charge on the member.

Unauthorised payment
Where an unauthorised payment is made to a member or an employer the tax charge will be 40% of the amount of the unauthorised payment.

Scheme sanction charge
The scheme administrator will be liable to a scheme sanction charge on all charges except where the assets used to provide the benefit is not a wasting asset. The amount of the scheme sanction charge is 40% of the scheme chargeable payment. 

However where the member or sponsoring employer has been subject to an unauthorised payments charge and has paid the tax due, a deduction will be made to the amount of the scheme sanction charge.

The amount of the deduction is the lesser of:
• 25% of the amount of the scheme chargeable payment, and
• the actual amount of tax paid by the member or employer on an unauthorised payment.

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