Avoid SSAS SOS with this SSAS 101
Gareth James, head of technical at AJ Bell, flags the key issues for paraplanners when helping clients already involved with, or setting up, genuine SSASs
SSASs have attracted regulatory and press attention for all the wrong reasons in the last few years.
The primary cause of concern has been the use of SSASs by scammers for pension liberation. That led to a HMRC clampdown on the use of pseudo-SSASs for fraud.
Measures introduced to date included stringent checks on new schemes and administrators before HMRC registration; allowing transferring administrators to check the registration status of schemes with HMRC before moving funds; and giving HMRC the authority to close schemes if the employer sitting behind them is not genuinely trading.
These measures have been successful in reducing the number of fake schemes being set up, but the DWP is still planning more. There are plans to restrict the legal right to transfer to an occupational scheme unless the transferring member provides employment proof through pay and other information.
With this regulatory clampdown now taking full effect, perhaps now is the time to run through some of the key issues for advisers and paraplanners to look out for when they’re helping clients who are already involved with, or setting up, genuine SSASs. After all, regulatory attention on SSASs hasn’t solely focussed on fraud. HMRC has also reportedly been looking at cases where more typical uses of SSASs haven’t met the taxman’s expectations.
When considering the issues to look out for we’ll start with employer loans. The ability to lend pension funds back to the employer is a key attraction of SSASs from an investment perspective but is also one of the areas which has reportedly attracted regulatory attention.
So what to look out for?
A key practical consideration is that the loan to the employer must be secured by a first charge on an asset of at least an equivalent value to – and preferably more than – the amount being lent by the scheme.
If a client approaches you indicating they’ve heard they can use a SSAS to lend money from their pension to their business, the first question to ask is – is an asset available that you can offer as security, on which someone else (like a bank) doesn’t already have security?
Ideally this would be an asset owned by the business. However, it doesn’t have to be owned by them, or even one of the members, but use of security offered by someone not directly involved with the scheme is likely to lead to questions from HMRC.
The ability to value the asset is also important because HMRC are likely to ask for evidence of valuation if reviewing a scheme. The ideal asset to use as security is commercial property due to the clearly established valuation process. Sadly, unencumbered commercial properties are hard to find, meaning other assets need to be considered.
If you’re advising on a case involving other assets, make sure your client doesn’t fall into the trap of being encouraged to use valuations which conveniently come in at the value of the loan – HMRC may well scrutinise them!
Leasing back and paying rent on time
Purchasing commercial property from the employer, with the premises immediately leased back for the business to occupy is another popular use of SSASs.
A key issue your client will need to remember is that both the property purchase and leaseback need to be carried out on demonstrably commercial terms. That means paying a surveyor to come up with those valuations, and using the figures they provide. If your client doesn’t like those valuations, short of seeking alternative views, I’m afraid they’re stuck with them.
If your client is involved in a commercial property SSAS, another key point to highlight is the need to remember that the pension isn’t just an extension of the business once the property has been purchased. It’s now the landlord of the business and, as is the case with any other landlord, it expects the rent to be paid in accordance with the lease. If rent isn’t paid in full and on time there are likely to be severe tax consequences. HMRC views the non-payment of rent as a transfer of value out of the pension scheme to the connected tenant, which is an unauthorised payment. Similar issues apply if employer loan repayments aren’t made on time.
We’ve only skimmed the surface of the points to familiarise yourself with if you want to help your client avoid HMRC attention regarding their SSAS.
One final takeaway, which has relevance to each of the points covered above, is to be extremely cautious if it appears the employer loan and commercial property options are being used to prop up a business. Tethering the pension wealth of a client to the fortunes of a struggling business is a classic example of putting all of one’s eggs in what may well be an extremely vulnerable basket.