Steele Raymond and our team of pension property investment specialists have extensive experience in dealing with Small Self-Administered Scheme (SSAS) Loan Backs. Through this unique SSAS feature, pension schemes and individual members are able to generate capital in a more efficient and cost-effective manner, benefitting both the scheme and its members.
Using our many years of experience, we ensure that you or your client gain all the benefits of a SSAS Loan Back whilst maintaining compliance with HRMC regulations
A loan back is an attractive – and often under-utilised – option which enables a Small Self-Administered Scheme (SSAS) to effectively lend funds to its members. When a loan back is applied, it not only provides a means to avoid high-street lenders and unfavourable rates, but also allows the sponsoring company (and its members) to acquire capital for business investment and improvements.
Helping you and your clients to navigate Pension Property Investments
These rules are expanded upon in the sections below.
To ensure that no penalties are imposed by HMRC and the maximum protection for the SSAS pension scheme and its members, the SSAS provider will ensure that the SSAS loan-back rules are adhered to. One of these rules is that the loan must be repaid across a maximum term of five years. Therefore, both parties must be comfortable that the loan can be repaid off within this time.
On rare occasions, should there be any valid and unavoidable issues with repayment as a result of the borrower experiencing financial difficulties then it may be possible for the outstanding loan to be rolled over for a further five years. However please note that this will only be done once and will not be treated as a new loan.
Failure to appreciate the specific parameters of a SSAS loan-back could significantly impact upon its overall viability and should therefore be carefully considered by the scheme, its members and any other stakeholder.
Capital and interest payments must always be equal.
For example, if John and Sue wanted to borrow £250,000 at a fixed interest rate of 3% compounded over a 5-year term the amount payable would be calculated as follows:
Total amount that needs to be repaid = £289,818.52 (made up of £250,000 capital and £39,818.52 of the interest). Therefore, the amount payable each year would be (£250,000 + £39,818.52) / 5 = £57,963.70
The standard lending rules state that 50% of the value of the scheme can be borrowed (or ‘loaned back’) – so, in an example where the total pension pot is worth £500,000, the maximum available to be loaned would be £250,000.
Although a SSAS loan-back is different from a high-street loan – in that it is agreed between a member and their pension scheme – the interest payable must still be set at a commercial rate. Evidence would need to be obtained to confirm that the interest rate payable would be available in the open market and the loan was on commercial terms.
Please note that the loan back rules stipulate that the interest rate should be set at least 1% above the average base rate of high-street lenders.
In return for the loan the sponsoring employer (the borrower) must grant the pension scheme a first legal charge over an asset. This means that there cannot be any other outstanding loan against the asset which would take priority over the SSAS’s legal charge.
The asset must be worth at least the same as the value as the loan. For example if a loan of £250,000 was being taken and the sponsoring employer had premises worth £300,000 which was not subject to a prior charge then the property could be used as security and the pension scheme would take a first legal charge over the property. Please note that the value of the asset would need to be independently determined by a valuer.
Adhering to this rule often causes the most difficulties as generally the sponsoring employer will have a property that can be used as security, but it may already be subject to a prior charge. To get around this there are other assets that can be used as security such as boats and cars, as well as intangible fluctuating assets such as stocks and shares. So long as a valuation can support the value of these assets and the professional pension provider is happy to accept them as security they can be relied upon.
Third Party Legal Charge
In some circumstances the sponsoring employer may not have an asset of sufficient value which can act as security for the loan however one of the pension scheme members may. For example the member in his individual capacity may own his home free from a mortgage. Provided the member is given independent legal advice his property may be used as security for the loan and the pension scheme would take a first legal charge over the property.
As mentioned above it is not unusual for an asset to be subject to a prior charge particularly if the asset is a property, however in some instances there may be a way around this. The prior lender would need to be approached and they would need to enter a deed of priority with the pension scheme in order to give priority to the pension schemes loan. This will not always be possible particularly if the prior charge is in favour of a high street lender. Talk to us about the options…
What should you be aware of when considering a SSAS loan back?
With so much to consider, one might question the advantages of a SSAS loan back over the numerous alternative ways that a business might seek to acquire additional capital. This might initially depend on how valuable the pension scheme is, or in other words, how much could be borrowed when compared to a high-street lender.
For pension schemes with considerable assets, the loan amount would far exceed the more traditional options, and often the interest rate on a SSAS loan back agreement could be significantly more attractive.
Ensuring that there is an appropriate level of security against the loan is essential for all parties to consider. Although the main asset held by the majority of businesses will be a property – as will be the case for each of the pension scheme members in the form of a residential property – it is likely that the majority of these assets will have prior charges secured against them.
With this in mind, there are important viability considerations for the majority of SSAS pensions schemes where loan backs are concerned.
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