If you are having cash flow problems or the bank is requesting the repayment of capital amounts early or you wish to purchase capital equipment, and you have a SSAS (Small Self-administered Pension Scheme) then your company can borrow from this type of pension scheme at an interest rate of 1.5%. If you don’t have a SSAS then consider having one as it can be your own bank when you need funding for your business.
What is a SSAS?
A SSAS is an occupational pension scheme owned by the business. A SSAS has fewer than 12 members (i.e. no more than 11 members). The SSAS is mainly for company-controlling directors, partners, or selected senior employees. Special rules restrict contribution levels by directors, as well as the types of investments undertaken.
However, the SSAS can invest in commercial property, take out mortgages and buy shares in a private company (as well as the sponsoring company). Pension benefits are calculated as for occupational pension schemes.
Low Cost of Borrowing –If You Want It
A SSAS can lend to the company at 1% above the bank base rate. So, currently at 1.5% this is a very cheap form of company borrowing. Money loaned in this way can be used to repay more expensive borrowing, or be used for company expansion. Any interest payable by the company goes into the pension scheme.
You could have a higher commercial rate being paid by the company should you require something more akin to an investment return. The interest paid is deductible to the company and not taxed in the SSAS.
Connected Parties
In respect of a SASS, a ‘connected party’ is (i) a member of the SSAS or spouse or relative of a member; (ii) a partnership where one of the partners is a member or relative of a scheme member; (iii) the SSAS’s principal employer.
Since 2006, the SSAS can lend to a connected party. The transaction must be at ‘arms length’. The SSAS Trustees and advisers will take great care to ensure that the rules are strictly followed so as to avoid unauthorised payment charges.
Lending Criteria
The SSAS can lend to a connected company. The loan amount can’t exceed 50% of the net assets held in the SSAS at the date of the loan, and the term must be for a maximum of 5 years; the loan must be on an interest and capital repayment basis; the loan must be secured by a first charge against an asset of suitable value; and the interest rate for the loan must be at least 1% above the average high street base rate. Breaching of any of these rules could lead to a tax charge.
The Small Print
The asset used as security by the company cannot be owned by the SSAS. The level of security will include all the interest to be paid on the loan. If the loan is made to an unconnected third party, security may not be a requirement. The security must be in place before the loan is advanced. Fees in connection with the loan are paid by the borrower.
Example
The SSAS has net assets of £1,500,000. The company requires £350,000 for additional working capital and to repay current expensive borrowing; £400,000 to purchase machinery and for marketing purposes. The SSAS can loan 50% i.e. £750,000 to the company but will require adequate security for the loan. The cost of the loan will include capital and interest payments.
Practical Tip
A SSAS can reduce your reliance on the banks and provide a new source of funds to the employer company.
As always, specific advice should be obtained from a suitably qualified and experienced pensions adviser before undertaking transactions involving a SSAS.
By Tony Granger
