Technical: SSAS employer loan back
5 July 2017
John Keenan, corporate development manager, Xafinity SIPP & SSAS, looks at how a SSAS loan can works and benefit members, schemes and businesses.
SSAS employer loan back is a unique selling point of the SSAS, which could be used to help business growth or improve efficiencies by providing funding for additional stock, new plant or machinery, at a time when many of these businesses need it most. It often has the added benefit of bringing pension planning to the fore.
There are five basic rules for a company borrowing from their SSAS:
With base rates currently at 0.25%, a five year loan can be secured on an interest rate of just 1.25%.
Let’s look at an example and what should be considered both by the lender and the borrower.
Mr and Mrs Smith are owner directors of ABC Ltd. Between them they have £150,000 in personal pensions and £170,000 in previous occupational pensions, all money purchase.
The business is looking to make an investment of £100,000 in new plant and machinery however does not have the liquid cash for the purchase. With the existing pension funds there is potentially a loanback limit of £160,000, i.e. 50% of £320,000.
Mr and Mrs Smith could set up a SSAS and transfer in the existing benefits to the SSAS bank account. Subject to meeting the five lending criteria previously covered, the scheme can then lend the employer the money to purchase the plant and machinery in full. Capital and interest payments made by the employer back to the scheme for the life of the loan are treated as investment income. This creates liquidity for other investments, should the scheme trustees wish to diversify, and helps to build up the fund should they want to make further loans in the future.
Mr and Mrs Smith should also be aware that their retirement fund and the performance of the company are now inextricably linked. A failure by the company to meet its obligations will impact on their retirement funds directly and also on the company because the pension fund will hold a first charge against an asset.
Nuts & bolts:
A SSAS can only make loans to employers that sponsor or participate in the SSAS. For the loan to be advanced the employer must have an asset that it can offer up to the scheme for a first charge as security. The value of that asset must be equal to the value of the loan plus the interest over the full term of the loan and legal input is required to create the binding charge.
Security is often the killer point so we should look at that in a bit more detail. Assets used for security are typically commercial property and land. SSAS providers often prefer these assets because the involvement of a solicitor in the sale process should ensure that it doesn’t happen without the consent of the SSAS and its administrators / trustees. Also, should the loan default, these assets are unlikely to give rise to tax charges, should the security be called upon and the assets move into the SSAS.
To offer the employer’s premises as security must therefore mean that it is unencumbered, a situation that not many companies will be in. It also means that once security is taken by the scheme then it is not available as a first charge for any other borrowings.
It is worth noting that HM Revenue & Customs (HMRC) do not rule out any type of asset as security. However, there are clear warnings that should a SSAS acquire the asset via calling in the security then certain types of assets, for example residential property or taxable moveable property, can create significant tax charges for the scheme.
It is therefore crucial that the loan and its security are structured in such a way that in the event of default, a sale of the asset is forced and only the cash proceeds come into the scheme to cover the outstanding loan.
One last bonus, perhaps the icing on the cake, is that if a SSAS loan reaches the end of its term and is still outstanding then the loan may be extended. This is called a “rollover”. What’s more, provided that there is no increase to the amount of the loan, the rollover will not be treated as a new loan and therefore any existing security may continue, even if the security is less than the face value of the loan.
Documented and serviced correctly it is a fantastic source of funds at an interest rate the borrower is extremely unlikely to obtain elsewhere. The SSAS benefits from having a known and motivated borrower, with the safety net of security should the borrower run into difficulties. This symbiotic relationship often means that the SSAS loanback is an investment that once first made is often then made time and time again.
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