Lets talk about Loanback’s

We have written an easy to read guide to explain what a SSAS Loanback is and this will hopefully answer any questions you may have. Once you have read the guide, if you have any questions, please ask us, we love to hear from people!

What is a Loanback?

A SSAS can make loans and it can lend money to:

– Its sponsoring employer

– An associated employer (as long as it has been formally associated)

– A company which is not connected to the scheme or its members

– An individual who is not connected to the scheme or its members

The SSAS can’t lend to:

– Scheme members, past or current

– An individual connected to a member e.g. a members cousin

– A company connected to the member that is not an associated employer of the scheme

Before we move on we will explain what a “connected party” is and HMRC’s definition is:

– A scheme member, spouse or relative of a scheme member

– A partnership where a scheme member, spouse or relative of a scheme member is a partner

– An employer not participating in the scheme but controlled by a scheme member, spouse or relative of a scheme member or jointly by a number of connected parties

What can the loan be used for?

All loans must be made for genuine reasons of assisting the trade of the borrower and the loan must be used for this reason. A few examples of this are purchase of commercial property, purchase of stock, plant or machinery.

Note here though please, loans to keep ailing businesses afloat with cash flow are not allowed.

How much can the SSAS lend?

The maximum loan which may be made to a Sponsoring or Associated employer is 50% of the net value of the pension scheme’s assets (50% of its value minus any existing loans). The 50% rule does not apply to “unconnected parties” and we explain a bit more about that in further sections. If a loan exceeds the 50% limit, an unauthorised payments charge will apply. This is basically a hefty tax charge penalty applied by HMRC.

Tell me about how the loan needs to be secured?

All loans made to employers participating in the scheme must be secured throughout the term of the loan and the security requirements are:

– It must have real value and we will require an independent valuation of the asset

– The value must be at least equal to the loan capital plus interest over the loan term

– The security must be a first legal charge over the asset

– The security does not have to be provided by the borrowing party, it can be provided by other parties such as the pension scheme members or other family members

You may be wondering what can be used as security. A few examples are commercial property, certain business assets such as stock and personal investments such as land or investment portfolios.

HMRC state that residential property can be used as security and this falls into their category of “taxable property”. This category also contains tangible moveable property such as art, jewellery or vehicles and these items can be used as security but only can only if two conditions are met:

1 – The SSAS does not pay for any of the fees or costs of making the loan or the legal charge

AND

2 – The legal charge document does not contain a mortgagee in possession clause so on foreclosure the SSAS does not take ownership of the asset but can only enforce its sale

It is important to know that if the borrower defaults on the loan repayments or breaches the terms of the agreement, the SSAS trustees must take all available steps to enforce the repayment of a loan.  There must be no preferential treatment given to a Sponsoring Employer when enforcing the collection of the loan, even where this would result in the company being placed into liquidation.

As always, failure to comply with these conditions will have consequences: unauthorised payment charges!

What interest is payable on the loan?

All loans must charge a minimum interest rate of 1% above the “average of the six leading high street bank base rates” and this is HMRC’s rule. At 2016, this rate was 0.5% so including the 1% – the minimum interest payable is 1.5%. As anyone who has tried to borrow money will know, this is a fantastic rate! However, the SSAS can charge a more commercial rate of interest on the Loanback if they want to.

Another great bonus of a loan to the SSAS’s Sponsoring Employer is that the interest is a business expense so aids with reducing the company corporation tax bill!

How long can the money be lent for?

The loan term will be for 5 years and will be fully repaid (interest and capital) by the end of the term.

How is the loan repaid?

The loan will be repaid in equal instalments of capital and interest for each complete year of the loan, whether monthly, quarterly, half-yearly or annually.

What about loans to unconnected parties?

A SSAS can make loans to unconnected parties – a broad definition of this is a person or company who is not connected to a scheme member by marriage, family or business.

There are no specific terms given by HMRC with regards to an unconnected party loan but the trustees should ensure any loan is prudent, secure and on a commercial basis.  There is no specific limit on the percentage of the fund that can be lent to an unconnected party either.

Loans must not be made to unconnected parties for the purpose of purchasing taxable property such as residential property, vehicles, yachts, jewellery or fine art.