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HMRC allow Invested Regulated Occupational Schemes to make loans only, if they are genuine investments which must be prudent, secure and on a commercial basis. Loans can be made to a sponsoring company from a Taylor Patterson SSAS or more unusually to a genuine third party, companies or individuals. The five main conditions that need to be met are as follows when loaning to the sponsoring employer:
The loan must be secured throughout the term of the loan by means of a first legal charge over an appropriate asset that is at least equal to the loan value plus the interest. It will be necessary to provide Taylor Patterson with an independent Open Market Valuation of the asset to be used as security where appropriate and this charge needs to be registered at Companies House.
2. Interest Rate
The loan must be made with an interest rate of at least 1% above the average of the base lending rates of the six high street banks. The average being rounded up to 0.25%. This rate is published on the HM Revenue & Customs website under http://www.hmrc.gov.uk/rates/interest-ctsa.htm. We would recommend that the interest is fixed throughout the term and as long as the interest rate meets the requirements on the date the loan is granted it can be applied throughout.
The term can be for a maximum of five years. The term should reflect the purpose of the borrowing.
The maximum amount that can be lent by a Pension Scheme is 50% of the net market value of the Pension Fund. Existing loans will need to be deducted from this figure. This limit is applied at the point the loan is taken and is not re-tested at any later date.
Loans must be paid in equal instalments of capital and interest on at least an annual basis so the loan is fully repaid by the end of the term.
Any breach of the above can lead to unauthorised payment charges. It should be noted that loans cannot be made to Scheme Members and their relatives or connected parties, which do not participate in the Pension Scheme or partnerships in which Scheme members and/or relatives are Partners.
Case Study Example
Fred Leather is a director of the family business “Sofas to go” along with his brother Simon. The business was set up by their father Joe Leather.
Fred and Simon’s wives are both now in the scheme being employed by the business. They were brought into the scheme to take new contributions since the annual allowance has recently reduced and they want to reduce their corporation tax bill.
The company is trading profitability and they are looking to expand, they need finance to open a new store, which to begin with they are going to lease. The amount they are looking to borrow is £250,000. They have spoken to the bank who would lend but it would involve refinancing some existing debt and changing their overdraft facilities. They are therefore looking for an alternative source.
Joe at 74 has retired from the business, although still drops in from time to time. He is currently drawing a pension of £50,000 from the scheme. The assets allocated to him amount to £510,000. The rest is predominantly allocated equally between Simon and Fred, with small amounts to their wives.
The rents on the store are £70,000 per annum and the mortgage is only £11,000 per annum. Liquidity to pay Joe’s pension is therefore not an issue.
The assets are made up of:
Furniture Store £750,000
Mortgage on above (£150,000)
Investment Portfolio £300,000
Total Value £925,000
The trustees are therefore looking to grant a loan to the principle employer of £250,000, secured against another store the company owns. To finance this they will liquidate some of their investment portfolio. Therefore, the maximum loan to the company in this scenario, would be 50% of £925,000 = £462,500. This is all within the maximum 50% loanback facility HMRC will allow.
For further information contact Kerry Houghton, Business Development Manager on 01772 550614 or alternatively Kerry.Houghton@taypat.co.uk.