The change in HMRC regulations that came into force on 6th April 2006, reduced significantly the amount SIPP and SSAS can borrow. The maximum that either can now borrow is 50% of the value of a scheme's net assets immediately before the borrowing takes place.

The net asset value of the scheme is the value of its assets less any liabilities including the balance on any existing loan.

A SIPP can no longer borrow a separate amount to pay VAT when purchasing or developing a property and therefore when calculating the finance needed to fund the transaction, any VAT payable has to be taken into account notwithstanding it will be recovered shortly afterwards. Also stamp duty together with the legal and other costs of the purchase, into account when calculating the finance needed.

SIPP and SSAS can borrow for purposes other than property purchase and development must be taken, for example, to provide cash to fund a retirement lump sum or the transfer of a member's benefits out of a scheme.

Schemes are not restricted to borrowing from banks or other commercial lenders; they can borrow from a member or connected party or any other third party provided the transaction is on commercial terms and the arrangement is acceptable to Taylor Patterson.

Should the total amount borrowed exceed the permitted maximum the Revenue will impose a scheme sanction charge of 40% of the amount of the unauthorised borrowing.

For the purposes of establishing the net value of a scheme, assets must be valued strictly in accordance in accordance with HMRC regulations. The regulations state " The 50% limit is strictly applied to the value of the fund immediately before the borrowing takes place." This is taken to mean that the net asset value has to be established at the time the loan is drawn down. This can present problems where the amount to be borrowed is at, or close to, the maximum. For example, on commencing discussions with a lender, the net scheme assets are £500,000 giving a maximum loan of £250,000. However, when the loan is drawn down some weeks later, due to a fall in market prices, the net scheme assets are £450,000 and the maximum loan is £225,000. If a loan of £250,000 is agreed and drawn down there would be an unauthorised borrowing of £25,000 and a tax charge of £10,000 would be payable. It is, therefore, important where a scheme includes market assets that some margin is allowed for to take account of potential changes to asset values. This is particularly relevant when borrowing to undertake property development over a period of months with the loan being drawn down in stages. HMRC will insist on each drawing being tested against the limit. Taylor Patterson believes the solution is to agree with the lender that the whole of the loan is drawn down in one transaction and held on a development account at the bank with an interest set off arrangement.

Taylor Patterson has considerable experience with property loans and will give guidance on arranging loans to avoid the pitfalls of HMRC regulations but cannot accept any responsibility if a scheme enters into an arrangement that gives rise to a scheme sanction charge.