Using a SSAS as a loan source
SSAS offer an often overlooked source of finance available to clients, says Stephen McPhillips, Technical Sales Director, Dentons Pension Management
A small self administered scheme (SSAS) is an occupational pension scheme established by an employer for the benefit of selected employees – usually some / all of the directors of the employer company. In this respect, it is immediately different from a self invested personal pension (SIPP) because a SIPP is a personal pension scheme and, whilst an employer can, and often does, contribute to it, a SIPP is not created by an employer.
The distinction between SSAS and SIPP is an important one to draw. Not only are the legal structures of the two quite different, but also the ways in which they are regulated differ. SIPPs are regulated by the Financial Conduct Authority (FCA) whilst SSAS are not. SSAS with two or more members are, however, overseen by The Pensions Regulator (TPR).
The differences do not end there. In terms of possible investments, SSAS offers the opportunity to make a loan to the founder (and / or an associated) employer and there are restrictions on certain unquoted shares transactions through a SSAS which do not apply to a SIPP. It is the former investment type which this article will now consider in more detail.
Why might a business seek finance from a SSAS?
There could be a number of reasons why an employer might look to borrow funds from the SSAS in which it has an involvement. For instance, the SSAS may represent a friendly, known and quick source of finance for the business. Contrast this with the business having to approach a commercial lender where the parties are not known to each other at outset. Even if the business approaches its own bankers, the fact that the parties are known to each other might not mean that business borrowing is quick or simple to arrange.
Another reason why a SSAS loan may be attractive is that the interest, which must be paid at a commercial rate, is being received tax-free into the SSAS for the benefit of the members, rather than being paid to a third party lender.
What are the requirements for SSAS loans?
There are five key criteria which must be adhered to in order to avoid the loan being treated by HMRC as an unauthorised payment to the borrower. If any of these are not met, then the loan may create unexpected and unwanted tax charges. The five criteria are as follows:
• Maximum amount of loan – 50% of the net asset value of the SSAS, including any existing loans to employers
• Interest rate – at least 1% above the average of 6 leading high street bank base rates, or some other demonstrably commercial higher rate
• Repayments – equal instalments of capital and interest payments, paid at least quarterly
• Maximum term – 5 years from the date the loan was advanced
• Security – a First Legal Charge over a suitable asset or assets of at least the equivalent value of the loan plus interest
How does it work in practice?
Provided that there is suitable security available to cover the loan plus interest, the loan can be arranged quickly and easily by the SSAS trustees and the funds can be lodged with the employer within a matter of a few weeks. The underlying use to which the borrowed monies can be put is much more flexible than it was pre-6 April 2006 and can now include cash-flow requirements of the business. However, care needs to be taken if the borrowed monies are being used to acquire taxable property.
In this instance, the taxable property can only be used for the purposes of the employer’s trade, profession or vocation or for the purposes of the employer’s administration or management. In addition, the taxable property must not be used or occupied by a member of the SSAS or a connected person.
Usually, the bigger stumbling block relates to the security being offered for the loan. Whilst the security need not be offered by the actual borrower of the money, it can be offered by anyone willing to do so, if it takes the form of an asset which may be worth less than the outstanding loan plus interest at the time of default. Otherwise this could result in unwanted and unexpected tax charges.
Take, for example, a situation where a loan of £100,000 is made to the employer. The employer then, unfortunately, fails, leaving £55,000 loan and interest outstanding. If the asset over which the Legal Charge is taken is only worth, say, £45,000 then an amount of £10,000 may not be recoverable from the employer. If it remains unrecoverable, it becomes an unauthorised payment to the employer and taxed accordingly. If the employer cannot pay the tax charge, it will be passed on to the scheme administrator of the SSAS to pay. All round, this is an undesirable position for the employer, SSAS members and scheme administrator.
Some assets represent greater security than others and have more certainty of value, even in the event of demise of the borrower. For example, a commercial property is likely to retain more value than would be found in the form of shares in the borrower’s business, plant and machinery owned by the borrower, intellectual property owned by the borrower, etc. In addition, if the SSAS trustees take possession of any taxable / tangible moveable property in the event of default, these also create unwanted tax charges.
It is for this reason that some SSAS administrators restrict the security to property only and nothing else. Hence, a SSAS loan to employer can represent a valuable and previously untapped source of financing for a business, but great care needs to be taken in structuring it.