A unique feature of Small Self-Administered Scheme (SSAS) is that they are able to make loans to their sponsoring companies. These are called authorised employer loans. These loans are not possible from a Self Invested Personal Pension (SIPP).
Loans cannot be made to SSAS members or anyone connected to them which means that where the SSAS is established by a partnership, loans cannot be made back to that business. Loans can be made to unconnected individuals and companies with the terms agreed between the trustees and borrower with no HM Revenue & Customs (HMRC) interference.
The loan can be used for any business purpose of the sponsoring company including the purchase of new stock, buying new premises or funding expansion of the business.
To qualify as an authorised employer loan, certain criteria must be met, broadly:
- Term: no more than 5 years.
- Security: secured by a first charge.
- Interest rate: minimum of 1% above base rate.
- Repayments: at least equal annual instalments.
- Amount: no more than 50% of the net asset value of SSAS.
The term can be extended for a further five years if at repayment the borrower is in genuine financial difficulties. The security must cover all outstanding capital and interest throughout the term of the loan and there can be no equal or higher ranking charges. The interest rate must be commercial and at least 1% above the average base lending rate of six high street banks specified by HMRC.
Information needed before an authorised employer loan is advanced
- Confirmation of the borrower.
- Details and valuation of the security, the valuation should carried out by an appropriately qualified valuer and be dated within six months of the loan being drawn down.
- You should decide upon the terms of the loan (ensuring that they meet the general conditions outlined above).
- A solicitor must be appointed in order to put the security in place. Barnett Waddingham does not insist on any specific solicitor being used and therefore you are free to find the most suitable solicitor for you needs.
- A valuation of the assets of the SSAS in order to confirm that the amount of the loan is less than 50% of the net asset value of the SSAS.
Tips for an efficient investment
- Don’t leave it to the last minute before deciding to provide a loan from your SSAS to your company. It often takes a bit of time to set up the loan - we need to check the basis of the loan meets HMRC requirements, cash has to be available in the SSAS and suitable security has to be identified and valued.
- Obtain your solicitor’s confirmation the security is in place and enforceable before the loan is drawn down.
- Commercial property is the most efficient form of security. Whilst other assets such as residential property or plant/machinery can be used, these could incur tax charges (and will increase the cost of administration) if the loan fails.
- As the loan will be in equal instalment, your company should set up a standing order to make all repayments on or before the due dates. This will reduce the cost of administration and reduces the possibility of a tax penalty on late payment.
- Tackle late payments immediately.