Benefits of SSAS loan backs and how to avoid tax charges
SSAS loan backs can be useful for a growing business but they should not be entered into lightly, says Claire Trott, head of Pensions Technical, Talbot & Muir
Loan backs from a SSAS can be a very good thing for a growing business to use as a short-term funding option, the company will get to put the contributions they have paid over the years to good use and the members will be able to benefit from the interest paid from what should be a secure loan arrangement with someone they know, quite often themselves. There are a number of hoops, five in fact, that need to be jumped through in order to ensure that a loan back is not going to cause any tax charges, and they shouldn’t be entered into lightly.
Security is usually the biggest issue when looking at a possible loan back. The loan must be secured throughout its term by a first charge over an asset with a value at least equal to the value of the loan plus interest. The interesting thing about the asset is that it doesn’t actually have to be owned by the company but it can’t have a charge, even a floating charge over it at any point during the loan.
It is possible to change the security during the period of the loan, should the asset need to be sold but the replacement security must be at least equal to the market value of the original asset or, if lower, the value of the outstanding loan plus interest.
The actual nature of the security will depend on the SSAS Scheme Administrator. Some will allow a charge over taxable property, even residential property in some cases but it is likely to be structured such that the charge is over the proceeds of sale rather than the asset itself. This is a grey area and to be certain that no unauthorised payment is deemed to have been made, it is prudent to be confident the scheme is not acquiring an interest in taxable property.
In most cases security is over a commercial property or other asset that can be easily valued.
2. Interest Rate
The minimum interest rate that can be applied to a loan back is determined by HM Revenue and Customs, and must be no less than 1% above the average clearing bank base rate for six nominated high street banks, rounded up to the nearest 0.25%. Thankfully this is published on the HMRC website and it should be noted that it is the minimum rate, although it is unlikely a company is going to want to pay anything higher.
3. Term of Loan
The term of a loan back must be set at outset and it cannot be more than five years and must be repaid fully within the term.
4. Amount of Loan
As with scheme borrowing the loan cannot be more that 50% of the value of the scheme. This is calculated immediately before the loan is made and not retested unless there are additional loans made. This means that should a member be taking an income or there is a drop in the value of the assets for some reason then the loan will not suddenly become excessive and cause any unauthorised charges.
5. Repayment Terms
The loan back must be repaid in equal instalments of capital and interest for each complete year of the loan. If loan repayments are missed or are not sufficient to meet the repayment requirements each year then an unauthorised payment is deemed to have been made, which will cause tax charges so should be avoided at all costs.
Scheme Administrators are likely to impose their own rules as well as those prescribed by HMRC. These will usually be to protect the scheme, such as credit checks and anti-money laundering checks on the employer to whom the loan is being made.
But why do it at all?
The real benefit of a loan back is putting all those hard-earned pension contributions made by the member and their employer, which may be one and the same, to good use. The expansion of the business would be an ideal use, an extension to their premises or so on.
The loan can really be used for any purpose within the business, but it shouldn’t be used to prop up a failing business. If the business is in real financial difficulties then by using the employees’ pension funds, if it all goes wrong, their jobs may be lost and to top it all off their pensions may be lost too, both due to lack of repayment and additional charges imposed by the non-repayment of the loan.
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