Borrowing

There is no need to retest the borrowing limits unless any further borrowing takes place.

Yes, but this might not be sensible as there would be no tax relief on the repayment.

Any loan taken out before 'A' Day will not be re-tested at that date. However, it will be taken into account in the 50% limit should the self-invested personal pension wish to borrow further amounts after 5 April 2006.

It is the current amount of loan outstanding including any interest.

Yes

As a self-invested personal pension scheme is a money purchase arrangement, the scheme assets are valued by taking the aggregate amount of money and the market value of assets held under the arrangement. The market value generally means the price which those assets might reasonably be expected to fetch on a sale in the open market.

A SIPP can borrow funds from any individual, company or financial institution whether or not they are connected to the scheme. The transaction must be made on an arm's length basis. If not, then this may create an unauthorised payment. Breaking the rule will result in a 40% tax charge.

A person is connected with another person if that person is the individual's wife or husband, or is a relative, or the wife or husband of a relative, of the individual or of the individual's wife or husband.

Trustees are deemed to be connected with settlers of trusts. People in a business partnership are also deemed to be connected. Partners are also connected to their fellow partners' spouses and relatives.

A company is connected with another company if the same person has control of both, or a person in control of one is connected in one of the ways above with a person who controls the other company.

If a scheme borrows more than 50%, the pension scheme is treated as making a scheme chargeable payment and will be subject to a scheme sanction charge of currently 40% on the amount of borrowing over 50%.

Where there has been previous borrowing, the amount of the scheme sanction charge will depend on whether the original loan is below the 50% limit immediately before the new borrowing takes place.

If the amount of the original borrowing is below the 50% limit only the amount of the new loan that exceeds the 50% limit will be chargeable. For example,

XYZ self-invested personal pension scheme borrows £75,000 on 1 December 2006 to purchase a property. The net value of the personal pension scheme arrangement as at 30 November 2006 is £160,000.

On 1 December 2008 the amount outstanding on the original loan is £70,000 including interest and the personal pension scheme arrangement has a net value of £250,000. The scheme borrows a further £60,000.

The borrowing limit is 50% of the net value of the arrangement, which is £125,000 and as £70,000 of the previous borrowing is still outstanding only £55,000 of the limit remains.

As the new borrowing is £60,000 the scheme is liable to a sanction charge on £5,000 @ 40% = £2,000.

This tax is payable by the scheme administrator.

If, however, the amount of the original borrowing exceeds 50% of the value of the scheme immediately before the new borrowing takes place (e.g. if there has been a drop in value of the scheme assets after the original borrowing was taken out) the scheme sanction charge will only be charged on the whole amount of the new borrowing. For example,

XYZ self-invested personal pension scheme borrows £50,000 on 1 December 2006 to purchase some shares. The net value of the personal pension scheme arrangement as at 30 November 2006 is £100,000.

On 1 December 2008 the scheme borrows a further £20,000.

The amount outstanding on the original borrowing is £45,000 including interest but the personal pension scheme arrangement is now only valued at £80,000 due to the shares dropping in value.

As the amount outstanding on the original borrowing (£45,000) exceeds 50% of the fund value (£40,000) immediately before the new borrowing takes place, the scheme is liable to a scheme sanction charge on the amount of the new borrowing £20,000 @ 40% = £8,000.

The tax is payable by the scheme administrator.