The impact of the Coronavirus is being felt by businesses throughout the UK. Navigating the complicated government support programs can be a challenge and so is keeping cash/liquidity available. This is where family businesses with a Small Self-Administered Pension Scheme (SSAS) may find a quick and easy solution with the ability to quickly arrange a SSAS loanback.
It does what it says on the tin; subject to meeting loanback rules, the SSAS can provide much needed finance to the sponsoring company.
Some media sources have promoted these schemes as a panacea for corporate debt and whilst the number of loans has quadrupled in April 2020 (compared to January 2020), as is often the case, the devil is in the detail. Without professional advice, the lauded savour could in fact compound the misery.
Firstly, to manage expectations, a company wishing to make use of a SSAS loanback but which does not yet have a SSAS in place will have to wait around 4 months for the advance to materialise as this is the timescale to create, register and transfer funds to a newly created scheme.
Whilst SSASs do have an almost unique feature of being able to lend funds to their sponsoring or associated employer, there are five strict criteria which need to be met before the advance to the company can be deemed a loan and not an unauthorised employer payment. The latter could trigger a plethora of tax charges on both the employer and the scheme and it can be the simplest of errors that make the difference.
In the case of Eden Consulting Services (Richmond) a loan was granted from a pension scheme and appropriate legal charge drawn up as security. However, whether by error or design the charge was never registered and the First-tier Tribunal (FTT) held that a loan secured by unregistered charges was not enforceable and therefore as no security existed the “loan” was an unauthorised employer payment.
In a more recent case, a London based light fittings company was hit with an £80,000 tax charge as a result of taking inappropriate advice from a pension practitioner, rather than a specialist independent trustee and Scheme Administrator.
Technical Note on Making Loans
Unique to a SSAS is the ability to make secured loans on a commercial basis to the sponsoring employer for bona fide business purposes. The maximum amount the scheme can lend is 50% of the net asset value of the scheme. The loan must be legally secured for the full term and the security must be worth at least the value of the outstanding loan plus the interest. The minimum interest rate must be 1% above the average base lending rates of the 6 leading high street banks. Our current starting position is a commercial rate fixed at 3.5% above base, so 3.6%. The term must be for 5 years or less, and be repaid on a capital and interest basis, with at least annual repayments.
On all transactions between a SSAS and a connected party, evidenced arm’s length commercial terms should be maintained at all times. Another situation brought about by business closures has been the request for rental concessions, either by temporary deferral or waivers. Whilst a SSAS’s trustees, owning commercial property leased to the employer might rightly permit a concession, they should do so only where they have sought evidence of financial hardship and ensured they are not the debtor of least resistance which might question the commerciality of the relationship.
On these and other SSAS related matters, the directors at Hurley Partners have over 100 years’ of SSAS experience in trusteeship, advice and scheme administration. Should this expertise be of importance to you or your clients please contact Martin Tilley by e-mail – email@example.com or visit our website at hurleypartners.co.uk.
Hurley Partners strongly recommends that individuals should seek suitable professional advice regarding the matters referred to in this document, which has been prepared for general interest only. Nothing in this document constitutes advice. Hurley Partners Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 8401891. Registered Office; 12 Conduit Street, Mayfair, London, W1S 2XH. © Hurley Partners Limited 2020