SIPP borrowing rules: how much can a SIPP borrow?

SIPP borrowing rules in short: a SIPP can borrow up to 50% of its net value, the excess is taxed, and a loan from it to you is taxed too.

The SIPP borrowing rules sit in tax law, not in any one provider's small print, and the main one is a cap on how much the pension can owe. Borrowing sums depend on your own figures. The FCA-authorised adviser you speak to via the form on this page is able to run the 50% test on them, free.

SIPP borrowing rules: how much can a SIPP borrow?

A SIPP can borrow up to half of its own net value. In HMRC's Pensions Tax Manual, a registered scheme "may borrow money for any purpose" and "may borrow an amount up to the equivalent of 50% of the net value of the fund prior to the borrowing taking place". Section 182 of the Finance Act 2004 is the law behind it for money purchase arrangements such as a SIPP, and it makes any borrowing above the limit unauthorised.

Two details matter. The fund is measured before the loan is taken, and the manual says the asset being bought with the borrowing is left out of the calculation. The limit also counts what is already owed: HMRC says scheme administrators "must take into account any existing borrowing" when working out how much room is left.

Borrowing means more than a bank loan. A registered scheme is treated as borrowing "if that amount is to be repaid or met from cash or assets held for the purposes of the pension scheme", so a liability that the SIPP's own money will have to meet falls inside the limit too. The manual adds that occupational schemes may face separate DWP rules under the Pensions Act 2004. Either way, the tax cap is a ceiling, not a promise that a lender will offer a loan of that size.

How the 50% limit is worked out

The Act's test for a money purchase arrangement compares what the SIPP would owe with half of what it holds. HMRC writes it as (APB + PB) being less than VA/2, where APB is the amount previously borrowed and not yet repaid, PB is the proposed new loan and VA is the value of the arrangement. In plain terms, old debt plus the new loan must stay under half of the pot.

The value of the arrangement counts all the money and assets in it, including uncrystallised rights and funds already in drawdown. The manual says the limit applies "to each separate arrangement" for money purchase schemes, and that it is "strictly applied to the net value of the fund immediately before the borrowing takes place".

HMRC's own example shows the arithmetic with earlier debt in the picture. A scheme that borrowed £75,000 in 2006 still owes £70,000, and its arrangement is now worth £250,000. Half of that is £125,000, so "only £55,000 of the limit remains". Borrowing another £60,000 goes £5,000 over.

What a SIPP borrows for, and who sets the terms

HMRC says trustees "may sometimes wish to borrow funds, for example to enable them to purchase an asset", and that borrowing for any purpose is acceptable as long as the administrator is satisfied it will benefit the scheme. In a SIPP the usual asset is a building. The commercial property SIPP page covers which buildings count, stamp duty and VAT, and the eligible investments page covers what else a SIPP can hold.

The tax rules cap the amount; they do not set a price. On security, the manual says the scheme does not have to put up its assets, and that "it would be the lender's decision to determine the security required under normal commercial terms". Interest rates, fees and the loan-to-value a lender will accept come from the lender and from your SIPP provider's own terms. A purchase that needs a loan the pension would owe is worth testing before you commit. Ahead of any approach to a lender, the 50% sum can be tested against your own SIPP valuation by an FCA-authorised adviser, without a fee, on a phone call; to book it, give your phone number and postcode on the form on this page.

A loan also changes the risk. Investments can fall as well as rise in value, you may get back less than was paid in, and a loan that must be repaid does not shrink when the asset's value does. Past performance is no guide to what comes next.

What happens if a SIPP borrows more than the limit

Borrowing above the limit is unauthorised borrowing under the Finance Act 2004, and HMRC taxes it. The scheme is treated as making a scheme chargeable payment, and the manual says "the excess amount of the borrowing that is above the 50% limit will be subject to the scheme sanction charge of 40%". The scheme administrator pays that charge, and it must report borrowing over the limit to HMRC.

Earlier debt can make this worse. If the SIPP is already over half its value when it borrows again, the charge is on all of the new loan, not just the excess. HMRC's example: £45,000 is outstanding, the pot has dropped to £80,000, so the limit is £40,000, and a further £20,000 loan brings a charge on "the amount of the new borrowing of £20,000 @ 40% = £8,000".

Falling values alone do not trigger it. The manual says that if the assets drop in value after the borrowing is obtained, "there is no need to retest the borrowing limits unless any further borrowing takes place".

Can you borrow money from your own SIPP?

Not without a tax charge. The SIPP can lend to others, but HMRC says "loans to members (or those connected to members) will be taxed as an unauthorised payment". A loan to you from your own pension is not one of the payments the Act lets a scheme make to a member, and it is not a "pension loan" you can arrange. Anyone offering one should be checked against the pension scams warning signs. The full explanation of what the tax charge looks like is in borrowing against your pension.

If you lend to the SIPP, the position is different: that is borrowing by the scheme, so it counts within the 50% limit. HMRC says money borrowed from "any member or sponsoring employer or a person or business connected to the member" must be on a commercial rate, otherwise it is subject to a tax charge.

SIPP borrowing questions

What interest rate does a SIPP loan carry?

There is no set rate in the tax rules. The lender prices the loan on commercial terms, so a SIPP loan rate is whatever that lender offers for the property and the borrower. A rate printed on a lender's own page or quote is the figure to rely on, and only on its date.

Does a fall in my SIPP's value breach the limit?

Not by itself. The test is applied when the borrowing is taken out, and HMRC does not require a retest if values later fall. Fresh borrowing would be tested again, against the pot's value at that point.

Can my SIPP lend money to my business?

HMRC treats a loan from a registered scheme to a member, or to a company connected to one, as an unauthorised payment. Loans to a sponsoring employer can be authorised, subject to conditions, only from occupational schemes, and a personal pension has no sponsoring employer. The SSAS loan rules page covers the small self-administered schemes that can lend to their employer.

Is a re-mortgage tested against the 50% limit again?

Replacing or restructuring a loan needs no new test if the amount borrowed does not rise. HMRC adds that a change of lender, a longer repayment period or a different interest rate would not alone normally trigger one. Rolling unpaid interest into the new loan counts as an increase.

Does my SIPP have to put up its assets as security?

HMRC's manual sets no such requirement. The lender decides what security it wants.

Before anything is signed, use the enquiry form here to book a call on the plan and your pot with an FCA-authorised adviser; no fee applies. For the wider picture, start with what a SIPP is and the tax rules in pension tax relief.