PTM124000 - Investments: borrowing
Glossary PTM000001
Borrowing - Introduction
Borrowing money by a registered pension scheme
Restrictions when borrowing money by registered pension schemes
Reporting unauthorised borrowing
Authorised borrowing limits
Money purchase arrangements other than collective money purchase arrangements - borrowing
Relevant arrangements - borrowing
Effect of unauthorised borrowing - money purchase arrangements and relevant arrangements
Security
Borrowing made prior to 6 April 2006
Replacing or restructuring existing borrowing
Rolling up outstanding interest
Transferring existing borrowing by another registered pension scheme
Borrowing - Introduction
Trustees of registered pension schemes may sometimes wish to borrow funds, for example to enable them to purchase an asset. There is no objection to a registered pension scheme borrowing funds for any purpose providing that the scheme administrator/trustees are satisfied that the borrowing will benefit the scheme and that the borrowing is within the rules laid down by the Department for Work and Pensions (DWP).
A registered pension scheme is treated as borrowing or having a liability of an amount, if that amount is to be repaid or met from cash or assets held for the purposes of the pension scheme.
Borrowing money by a registered pension scheme
A registered pension scheme may borrow money from any source. If the registered pension scheme borrows money from any member or sponsoring employer or a person or business connected to the member or sponsoring employer this must be done at a commercial rate otherwise it will be subject to a tax charge - see PTM134000.
Restrictions when borrowing money by registered pension schemes
A registered pension scheme may borrow money for any purpose. The scheme may borrow an amount up to the equivalent of 50% of the net value of the fund prior to the borrowing taking place. The value of the fund for this purpose would not include the investment that is to be purchased with the borrowing.
Borrowing by registered pension schemes may be further limited by rules in the Pensions Act 2004.
Where the borrowing exceeds the 50% limit, the scheme will be treated as making a scheme chargeable payment and the scheme administrator will be liable to a scheme sanction charge of 40% (PTM135000).
The scheme administrator must report to HMRC details of borrowing that exceeds the 50% limit. Such reports are required when the borrowing exceeds the limit on or after 6 April 2010.
Reporting unauthorised borrowing
Regulation 5A The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567 as amended by The Registered Pension Schemes (Provision of Information) (Amendment) Regulations 2010 - SI 2010/581
If a registered pension scheme borrows an amount which is not authorised the pension scheme is treated as making a scheme chargeable payment under section 183 or 185 Finance Act 2004. The authorised borrowing conditions are described below.
A scheme chargeable payment in relation to unauthorised borrowing is subject to a scheme sanction charge (see PTM121000).
Information required
The information to be provided is:
- the name of the pension scheme that is treated as making the scheme chargeable payment
- the pension scheme tax reference number for the pension scheme
- the name and address of the scheme administrator of the pension scheme treated as making the scheme chargeable payment
- the tax year in which the scheme chargeable payment is treated as having been made
- the aggregate amount of the scheme chargeable payments treated as having been made under section 183 or 185 Finance Act 2004 by the pension scheme for the tax year.
When must the report be submitted?
The report must be submitted to HMRC after the end of the tax year to which the report relates but by no later than 31 January following the end of that tax year.
For example, a report for unauthorised borrowing that occurred in the 2014 to 2015 tax year must be submitted after 5 April 2015 but by no later than 31 January 2016.
Where a pension scheme is wound up, the report must be submitted to HMRC no later than 3 months from the date of completion of winding up if this date is earlier than the 31 January following the tax year in which the unauthorised borrowing took place.
How must the report be made?
The report must be made in writing. It should be a single report that has details of all of the scheme chargeable payments that are treated as being made as a result of the unauthorised borrowing that occurred in the tax year concerned.
The written report can be made using the form APSS303, which is available on the HMRC website.
If the report is being made by any person on behalf of the scheme administrator the report must state that is the case and the name and address of the scheme administrator must be given in the report.
The report cannot be delivered electronically by Pension Schemes Online, or by the Managing Pension Schemes online service (for schemes that applied to register on or after 4 June 2018), as it is not one of the ‘reportable events’ which is either required to be or may be delivered electronically see PTM168000. Also, details of other scheme chargeable payments that are treated as having been made that must be reported as ‘event report 18’ (see PTM161600) should not be included in the written report relating to unauthorised borrowing.
Authorised borrowing limits
Sections 183 and 184 Finance Act 2004
A registered pension scheme is authorised to borrow an aggregate amount up to 50% of the net value of the fund immediately before the borrowing has taken place.
The value of the asset being purchased using the borrowing must therefore not be taken into account when calculating the value of the fund unless exceptionally it is already held as an asset of the scheme before the borrowing takes place (for example, a re-mortgage).
Scheme administrators/trustees must take into account any existing borrowing when calculating the limits.
For money purchase arrangements, that are not collective money purchase arrangements, the limit applies to each separate arrangement. For relevant arrangements the limit is applied to assets held in the scheme as a whole (less any assets which are, exceptionally, held in money purchase arrangements).
A ‘relevant arrangement’ is a defined benefits or a collective money purchase arrangement.
The value of the fund is calculated in different ways depending on whether the scheme is a money purchase scheme (see Money purchase arrangements other than collective money purchase arrangements - borrowing below) or another type of arrangement (see Relevant arrangements - borrowing below).
If the scheme assets drop in value after the borrowing is obtained, which results in the borrowing exceeding the 50% limit, there is no need to retest the borrowing limits unless any further borrowing takes place.
The 50% limit is the total amount which a registered pension scheme can borrow: there is no separate limit to fund a liability for VAT, for example.
The 50% limit is strictly applied to the net value of the fund immediately before the borrowing takes place.
Example
PP Ltd Registered Pension Scheme has assets worth £200,000 but has a liability in the form of borrowing of £50,000.
The maximum amount which can be borrowed is £200,000 less £50,000 x 50% = £75,000, that is, further borrowing allowed of £25,000.
Money purchase arrangements that are not collective money purchase arrangements - borrowing
Section 182 Finance Act 2004
The amount of authorised borrowing which may be obtained in respect of a money purchase arrangement, that is not a collective money purchase arrangement, is an amount not greater than 50% of the net assets in that arrangement immediately before the borrowing is taken out. This is calculated by the following formula:
(APB + PB) is less than VA/2
Where:
APB is the aggregate amount previously borrowed in respect of the arrangement (excluding any amounts already repaid).
PB is the proposed amount to be borrowed.
VA is the value of the arrangement.
Value of arrangement
The value of the arrangement is the aggregate amount of money and the net market value of assets held for the purpose of crystallised and uncrystallised rights under the arrangement. These include drawdown pension funds (member’s, dependants’), flexi-access drawdown funds (member’s, dependants’, nominees’, successors’) and the value of scheme pensions and dependants’ scheme pensions in payment, but excludes the value of any annuities in payment.
The capital value of a scheme pension or dependants’ scheme pension payable is 20 x the annual pension payable.
For cash balance arrangements the value of the uncrystallised rights is the amount that would be available from those rights to provide benefits if the member were taking the benefits at that time.
If the arrangement is a money purchase arrangement that is not a cash balance arrangement, the value of the uncrystallised rights is the aggregate of the money and the net market value of assets held for the purpose of the arrangement which are properly attributable to the arrangement.
Providing that the aggregate amount borrowed does not exceed the above amounts the borrowing will be treated as authorised.
The effect of any unauthorised borrowing is explained at Effect of unauthorised borrowing - money purchase arrangements and relevant arrangements below.
Relevant arrangements - borrowing
Section 184 Finance Act 2004
The amount of authorised borrowing which may be obtained in respect of a relevant arrangement should not be greater than 50% of the net assets held by the pension scheme for relevant arrangements before the borrowing is taken out. Occupational pension schemes may be subject to separate DWP rules set out in the Pensions Act 2004.
The limit on borrowing in relevant arrangements is arrived at by the following formula:
(APB + PB) is less than AARA / 2
Where:
APB is the aggregate amount previously borrowed by the scheme in respect of relevant arrangements (excluding any amounts already repaid).
PB is the proposed amount to be borrowed.
AARA is the aggregate amount of the relevant sums and assets.
The relevant sums and assets is the aggregate amount of the sums and the net market value of the assets held which are properly attributable to the relevant arrangements.
Effect of unauthorised borrowing - money purchase arrangements and relevant arrangements
Sections 183, 185 and 241 Finance Act 2004
If a registered pension scheme borrows an amount which is not authorised the pension scheme is treated as making a scheme chargeable payment and will be subject to a scheme sanction charge. The excess amount of the borrowing that is above the 50% limit will be subject to the scheme sanction charge of 40%. This tax is payable by the scheme administrator.
Where there has been previous borrowing, the amount of the scheme sanction charge will depend on whether that previous borrowing is below the 50% limit immediately before the new borrowing takes place.
If the amount of the previous borrowing is below the 50% limit only the amount of the new loan that exceeds the 50% limit will be chargeable - see example 1 below.
If, however, the amount of the previous borrowing exceeds the 50% limit immediately before the new borrowing takes place (for example, if there has been a drop in value of the scheme assets after the previous borrowing was taken out) the scheme sanction charge will be charged on the whole amount of new borrowing (see example 2).
Example 1
DD Ltd Retirement Benefit Scheme borrows £75,000 on 1 December 2006 to purchase a property. The net value of the arrangement as at 30 November 2006 is £160,000.
On 1 December 2008 the amount outstanding on the original borrowing is £70,000 and the 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 £250,000 x 50% = £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 administrator is liable to a sanction charge on £5,000 @ 40% = £2,000.
Example 2
GG Ltd Registered Pension Scheme borrows £50,000 on 1 December 2006 to purchase some shares. The net value of the 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 but the arrangement now has a value of £80,000, due to the shares dropping in value.
As the amount outstanding on the previous borrowing (£45,000) exceeds 50% of the net value of the arrangement (£40,000) immediately before the new borrowing takes place, the scheme administrator is liable to a scheme sanction charge on the amount of the new borrowing of £20,000 @ 40% = £8,000.
Security
Where a registered pension scheme borrows funds, there is no requirement that the scheme must offer its assets as security. It would be the lender’s decision to determine the security required under normal commercial terms.
Borrowing made prior to 6 April 2006
Borrowing which took place before 6 April 2006 was not re-tested at that date. However, it is taken into account in the 50% limit should the registered pension scheme borrow further amounts after 6 April 2006.
Replacing or restructuring existing borrowing
Where a registered pension scheme replaces or restructures existing borrowing, including borrowing which took place before 6 April 2006, no test against the 50% limit is required providing there is no increase in the amount borrowed. However, if the amount borrowed increases as a result of the replacement or restructuring then a test against the 50% limit is required. Any outstanding borrowing taken out before 6 April 2006 must be taken into account when testing against the 50% limit.
A change of lender, increase in repayment period or change in interest rate would not alone normally trigger a test against the 50% limit.
Rolling up outstanding interest
Where interest has not been paid on existing borrowing and the unpaid interest is then included in a replacement borrowing agreement this is treated as a restructuring of outstanding borrowing with an increase in the amount borrowed.
The total of the outstanding borrowing and the rolled-up interest should then be tested against the 50% limit.
Transferring existing borrowing by another registered pension scheme
A transfer of existing borrowing as part of a transfer of existing rights from one pension scheme to another is likely to mean that a new borrowing agreement would be drawn up as a consequence of that transfer. The drawing up of such a new agreement would mean there is new borrowing in relation to the receiving pension scheme that would be tested against the 50% limit.
However, in exceptional cases, there might not be a test against the 50% limit if the new borrowing agreement is, in all essential respects, a continuation of the agreement for the existing borrowing that was in place in relation to the transferring pension scheme.
Whether the new borrowing agreement is a continuation of the existing borrowing will depend on the facts and circumstances.
Exceptionally, a test against the 50% limit may not be needed where a member has directed that there is borrowing under their personal pension scheme and their benefit rights are then transferred from that pension scheme. Following the transfer to another personal pension scheme the only change from the existing borrowing agreement is that the new personal pension scheme provider is shown in the new borrowing agreement. In effect, the other parties to the existing borrowing - the individual whose rights were transferred (and who has directed that the borrowing be made) and the lender - have remained the same and the amount borrowed has not increased.
By contrast, a 50% limit test would be needed where borrowing has been transferred from one occupational pension scheme to another, even if the individual to whom the borrowing relates the amount borrowed and the lender remain the same. Similarly, a test would be needed if the existing borrowing was transferred from a personal pension scheme where the member directed that the borrowing be made to an occupational pension scheme or vice versa.