While it’s fashionable sister the SIPP has soared in popularity, particularly in the direct to consumer space (shhh, where it’s often not a real SIPP at all!), the SSAS remains a firm favourite of accountants and financial advisers.
Tens of thousands of SMEs in the UK now take advantage of the SSASs’ unique flexibility, in particular, family businesses.
The attraction of buying and holding commercial property and land in a SSAS has grown enormously since the new death taxation rules which remove the penalties from passing these kinds of assets down the generations.
What does surprise me is the often under-utilised USP of the SSAS, the sponsoring employer SSAS Loanback.
The SSAS loanback – the basic information
The first key point here is that every SSAS loanback is different. Advisers and accountants need to establish:
- The value of the client(s) existing pensions
- The value of any new contributions
- How much of a SSAS Loanback does the company require?
- What “fixed assets” the company (or the member personally) have to offer as first-charge security?
This information is used by SSAS providers as part of a more detailed review and discussion.
SSAS Loanbacks – the nuts and bolts
To protect the scheme, the SSAS provider will be looking to ensure the company can repay the loan under the SSAS Loanback rules. There are five key tests that any SSAS loan must meet to avoid tax charges:
- A 5-year maximum term
- Capital and interest repayments in equal instalments at least annually
- Maximum loan limit of 50% of the SSAS net assets
- Interest rate is at least 1% above current base rate (can be agreed at a higher rate as long as this is on commercial terms)
- Security must be in place
First-charge security – the killer points
Ultimately the scheme must be protected against loss through the provision of security by the borrower. After all, this is a pension scheme and ‘security’ is, therefore, vital. If the client thinks that the SSAS is a softer option than going to the bank in this respect then they are wide of the mark.
While there may not be as many fees/charges applied by a SSAS compared to a bank, the first-charge security is the killer aspect – no SSAS loan will be completed until the SSAS provider has documentation to confirm that suitable security is in place. The value of the security must be equal to the amount of the loan plus interest over the full term of the loan and legal input is required to create the binding charge.
Types of assets used as security
The assets used as security are often commercial property and land. These assets are often preferred by most SSAS providers because of the presence of a solicitor who can prevent its sale without the consent of the SSAS and its administrators/trustees. There is also the very low risk of any tax charges if the loan defaults and the property is moved into the SSAS.
HM Revenue & Customs (HMRC) do not rule out ANY types of assets being used as security in their Pensions Tax Manual. However, there are clear warnings that should a SSAS acquire (through calling in the security) certain types of asset (e.g. a residential property), then hefty tax charges will be imposed on the Scheme Administrator and the members. An understanding of the calling in of security is important and an experienced SSAS provider can help with that.
Some SSAS providers will accept the following assets as first-charge security but, for the above reasons, there are potential tax charges involved:
- Residential property (unencumbered!)
- Large plant & machinery
- Trucks
Ideally, security should be set up in a way that if the loan were to default it forces the sale of the asset and only the cash proceeds come into the scheme to settles the outstanding loan. This stops any taxable asset becoming part of the scheme and generating tax charges.
Scheme administrators – the warnings to your client
The formal role of “scheme administrator”, which requires HMRC registration, can be left “holding the baby” in terms of risky investments. Any tax charges arising from loans made without security in place, or failing to meet the five key tests, are treated as unauthorised payments and tax charges will apply to both the company and the scheme administrator.
Tax charges of up to 55% can apply to the company with additional tax charges on the scheme administrator of up to 40%. The amount that becomes taxable will depend on the key test that is not met. In a worst case scenario, the tax charges could be applied to the full amount of the loan and interest due at outset. Lots of time and energy is required to deal with the reporting and settling of tax charges, hence prevention is, therefore, the key.
SSAS providers can take on the scheme administrator role, taking 100% control of the cash transactions of a SSAS, and leaving the client assured of their protection. Some clients, however, may wish to take on the role of scheme administrator themselves to save on fees, but unless they employ the services of a scheme practitioner they will be left vulnerable in what can be pretty complex territory.
Sign of things to come…
In 2015, Xafinity experienced a 15% increase in SSAS loanbacks. In times of austerity and extremely challenging borrowing conditions for SMEs this seems surprisingly low to me. The concept of SSAS loan is not new and experienced providers are well versed in what is required and can work closely with clients and advisers. Many, who have used it once, do so again and again…
Jeff Steedman is head of business development SIPP & SSAS at Xafinity
The post SSAS loanback: Business funding’s best-kept secret? appeared first on Retirement Planner.