Connected Party Transactions: HMRC Rules Explained

HMRC defines connected parties in the context of SIPPs and other registered pension schemes through the Finance Act 2004 and the associated Registered Pension Schemes Manual. The definition is broader than many people expect. A connected party includes the pension member themselves, their spouse or civil partner, their parents and grandparents, their children and grandchildren, and any company in which the member holds a controlling interest (typically more than 50% of the shares).

Business partners and companies controlled by family members also fall within the connected party definition. If you own a company jointly with a sibling, that company is likely to be a connected party to both your SIPPs. The practical implication is that the vast majority of owner-managed business property transactions involving a SIPP will be connected party transactions, regardless of how the corporate structure is arranged.

HMRC permits connected party transactions in the context of SIPP commercial property, subject to specific conditions. The most common permitted transactions are: a connected party selling commercial property to a SIPP, a SIPP leasing commercial property to a connected party tenant, and a SIPP carrying out commercial property transactions where a connected party is the occupying tenant.

What is not permitted is the acquisition of residential property from or for a connected party. The residential property prohibition applies regardless of whether the transaction is with a connected or unconnected party — but the consequences of breaching the prohibition in a connected party context are more severe because HMRC regards such transactions as deliberate unauthorised payments.

Similarly, a SIPP cannot lend money to a connected party. While a SSAS (Small Self-Administered Scheme) can make loans to sponsoring employers under certain conditions, a SIPP has no equivalent power. Any cash loan from a SIPP to a connected party constitutes an unauthorised payment. Our guide to SSAS Property Finance covers the SSAS loan rules in more detail.

The single most important rule governing all SIPP connected party transactions is the market value requirement. Whether the SIPP is buying property from a connected party, selling it to one, or leasing it to one, every transaction must be conducted at the price that would be agreed between independent, unconnected parties in the open market.

This means that if a member's business sells its premises to the member's SIPP, the sale price must reflect the independent market value — it cannot be discounted to make the purchase easier for the pension, nor inflated to extract value from the SIPP. Similarly, rent charged to a connected party tenant must be the market rent for the property as though it were being let to an unconnected tenant.

Market value for property transactions must be established by an independent RICS-registered valuer. "Independent" means not connected to any of the parties. The valuation must be documented and retained as evidence of compliance. See our guide to RICS valuations for SIPP property for what this involves in practice.

HMRC classifies certain transactions as unauthorised payments — payments made from a registered pension scheme that are not permitted by the scheme rules or pensions tax legislation. Unauthorised payments are subject to a tax charge of 40% on the amount of the payment, payable by the scheme member. Where the unauthorised payment exceeds 25% of the fund value, a surcharge of a further 15% applies, making the total potential charge 55%.

In the context of connected party property transactions, common routes to an unauthorised payment include: allowing rent to fall significantly below market value, failing to collect rent from a connected party tenant, allowing a connected party to use or occupy the property rent-free, and selling property to or buying property from a connected party at a price other than market value.

The SIPP provider also faces a scheme sanction charge if it permitted an unauthorised payment. This creates a strong incentive for providers to enforce compliance rigorously — and it explains why providers take connected party transactions so seriously.

Connected party property transactions do not become compliant once and then stay that way automatically. Ongoing compliance requires regular attention. Rent must be reviewed at each review date and reset to market rent supported by a fresh valuation. Any changes to the lease terms, including rent concessions during difficult trading periods, must be assessed against the market value requirement before they are agreed.

If the connected party tenant falls into financial difficulty and cannot pay the rent, the SIPP trustee (in a full SIPP, this is typically the provider) must pursue the debt as it would for any commercial tenant. Forgiving or waiving the debt could itself constitute an unauthorised payment. This is one of the more challenging aspects of the connected party structure in practice.

Property improvements or extensions carried out by the tenant at their own expense can also create connected party complications if they increase the value of the SIPP's property without corresponding rent adjustments. We recommend taking specialist advice whenever any change in the property's condition or use is contemplated.