24 Dec 2014
Peter Mutch, Corporate Benefits Director, looks at Small Self-Administered scheme (SSAS) loanbacks.
Over the past few years we have seen a rise in enquiries for Small Self-Administered Scheme (SSAS) loanbacks.
A Small Self-Administered Scheme (SSAS) is a registered pension scheme with 11 or fewer members. It is designed for use by business owners, who might be company directors, members of a partnership or self-employed, for themselves and their employees.
For the entrepreneurial company director or proprietor, a SSAS is not only a pension fund to build for financial security in later life but also an excellent tool to assist in achieving business economic success.
Reluctance by banks to lend, and unattractive interest rates are drawing individuals to the benefits of using a SSAS for their business needs; it is the only type of pension scheme where a loan to a connected party is possible.
Recent news from the Bank of England has suggested that interest base rates may not go up as soon as expected. This may offer an opportunity to set up a loan before the base rate goes up, therefore fixing an interest rate as low as 1.5% over a five year term; a favourable borrowing rate by comparison with commercial terms.
The principle behind the loanback is simple; funds can be used for purchasing new stock or machinery to aid business expansion, or for items deemed normal operating expenditure, therefore using funds for salaries, or a bonus.
Through the SSAS offering a loanback facility to a sponsoring employer, there is more control over the interest rate, as HMRC rules allow the loan rate to be set as low as the base rate (currently 0.5%) plus 1%.
There is also the ability for the SSAS trustees to agree a loan rate based on current commercial lending rates available, which is a consideration where the business receiving the funds can meet a commercial market rate.
In this instance it can generate a good income for the scheme, particularly if there is no scope for contributions, for example where members have enhanced or fixed protection, or have already used their annual allowance.
There is clear guidance from HMRC; security, interest rate, minimum and maximum terms of the loan and repayment terms must all be agreed, to avoid any unauthorised payment charges. However, once these are agreed, the benefits to the business are favourable.
For example, the loan interest payments would be a tax deductible expense by the business repaying the loan and can be offset against corporation tax. This is preferable to making interest payments to a bank, and the trustees of the SSAS can benefit from the interest as an investment return for lending scheme funds.
If you would like more information or wish to discuss any of the above in more detail, please do not hesitate to contact me by clicking on my name below.