Can your pension scheme help your business’ finances?
As in any recession, businesses are currently struggling to conserve cash. Many small businesses and their directors have found that despite the plethora of government schemes, loans and ways of support, somehow all are either unobtainable or unaffordable and this leaves them with a real problem as to how to finance their business going forward. However, some may already have tools in place which can help with that via their pension scheme, in particular those who have got a small self-administered scheme (or SSAS).
For most of those schemes, the main asset they hold is property or other non-cash assets and under HMRC rules they are permitted to use these as security for loans to provide capital to their sponsoring company. At the moment, the borrowing rate for SSASs are very low which means the directors or business owners’ pension scheme could become an unlikely source of badly needed finance for businesses that are struggling to see a way through the current situation in the short-term.
How does the loan-back work?
A SSAS can provide loan finance back to a connected business at up 50% of the value of the total amount of cash held in the SSAS plus the net market value of the SSAS’ assets. Dependent upon the assets in the SSAS, this may provide an important “shot in the arm” in cash terms for the SSAS’ sponsoring employer.
Using SSAS loan-backs requires careful consideration as there are a number of HMRC tests to be met and the trustees of the SSAS ultimately need to be happy that any money loaned to the company (which is in reality the money the trustees themselves will use to retire with) is in fact a good solid investment for the SSAS to make.
For a SSAS loan-back to be an authorised payment, there are 5 separate tests to be met, these include a minimum 5 year term, borrowing can be up to 50% of the SSAS fund value but it must be secured against an asset and this must be by a first charge. The amount of the loan itself cannot be more than 50% of the value of the SSAS. The trustees of the SSAS will need to give consideration as to whether or not there is any future liquidity requirement as a result of members retiring to draw income from the SSAS.
All loans must be on commercial rates and be no less than 1% above the average bank base rate for the six nominate high street banks rounded up to the nearest 0.25% and the loan must be repaid in equal instalments of capital and interest for each complete year of the loan. Any directors or owners considering using a SSAS as a method of financing their business should be aware that 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 result in tax charges.
Are there any other ways my pension scheme can help in the recession?
SSAS’s can invest up to 5% of the fund value in the sponsoring company’s shares, if the company has property, the SSAS could invest in commercial property (though not in residential property) and then utilise either the borrowing and/or assets for loan-back purposes as set out above.
Other director pension arrangements, self-invested personal pensions (SIPPs) are also allowed greater freedom to invest in businesses and can be business friendly as they can also invest in commercial property, although loans are not allowed to the members or any person or company-related to the member but can be made to unconnected parties. Borrowing is based on the same principals as a SSAS, so up to 50% of the net value of the fund can be borrowed and investment in shares is also allowed, however if a SIPP invests in a company that is controlled by the member of an associated person this may become an unauthorised investment.
Can we help you refinance your business?
If you are looking for an alternative route to raising finance for the business, it is important you work with organisations who know what they are doing, and can steer you away from the minefield of tax charges around unauthorised payments. Our pensions and corporate teams have a wealth of experience in working with many UK SSAS and SIPP providers, and financial institutions in structuring SSAS and SIPP property, loan and share agreements. For more information about how we can solve your problems, in the first instance please contact Kim Jones
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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