Pension legislation permits a SSAS to make a loan to the principal/sponsoring employer.
This is a big plus point for a SSAS and loans to the principal/sponsoring employer happen frequently. But remember, a loan from a SSAS to a scheme member I remains an unauthorised payment and will attract a tax penalty.
For a loan from a SSAS to a sponsoring employer to be an authorised payment, it must meet five conditions. These relate specifically to:
- The amount of the loan
- The term of the loan
- The interest rate
- The repayment terms
- The security
Should a loan fail on any one of these conditions, it will result in an unauthorised payment. The amount of the unauthorised payment is not the value of the loan. I does depend on which condition fails to be met and each condition has its own calculation in terms of attributing a value to the unauthorised payment.
If two or more conditions fail to be met, the amount of the unauthorised payment is determined by whichever failed condition produces the highest unauthorised payment.
Let’s look at these conditions in a bit more detail.
The amount of the loan
The loan must not be more than 50% of the net asset value of the scheme. This is calculated at the point immediately before the loan is made.
This is a one-off test. If the net asset value later drops so that the outstanding loan amount comes to more than 50%, it does not create an unauthorised payment.
But, if the scheme makes a further loan, there is a further test of the 50%limit. This takes into consideration outstanding loan amounts and the net asset value at that time. If the 50% limit is breached, the unauthorised payment amount will be the difference between the total value of the loan(s) and 50 per cent of the net asset value.
Term of the loan
The term of the loan cannot be longer than five years from the date of the loan.
However, if a principal/sponsoring employer faces financial difficulties, the legislation does allow the SSAS to roll the loan over for a further five years.
Should a rollover take place, the terms of the original loan must stay the same. The rolled over loan cannot be treated as a new loan. It will not need to be tested against the 50 per cent limit again and any existing security can continue to be used.
Where the term exceeds five years, the unauthorised payment amount is calculated by dividing the loan amount across the number of days in the term then applying that pro rata against the number of days by which the term exceeds five years.
The SSAS must charge interest on the loan at a rate of at least 1 per cent above a specified interest rate. This is to ensure a commercial rate of interest is being applied. The specified rate of interest is based on the lending rates of six leading high street banks rounded up to the nearest 0.25 per cent.
If the interest rate applied is lower than the prescribed rate, the unauthorised payment is calculated by applying the shortfall on a percentage basis to the loan amount. For example, if the rate used is 10 per cent lower than the prescribed rate, the unauthorised payment is 10 per cent of the loan.
The loan must be repaid in at least equal instalments of capital and interest and it must also be payable at least annually.
This means that one fifth of the capital and interest must be repaid as a minimum by the end of year one, two fifths by the end of year two and so on.
It is important to point out that this requirement is about how the loan repayment terms are documented at the outset. It is not about how the repayments are actually made. When it comes to the payments, employers can front-load them or even repay loans early.
If a principal/sponsoring employer is unable to keep up with the repayment terms, it is important that the repayments are pursued by the SSAS on a commercial basis to reduce the chances that HMRC decides an unauthorised payment has occurred.
If the repayment terms do not meet the minimum required amount, then an unauthorised payment amount is calculated as the difference between these two figures in whichever loan year provides the biggest difference.
The value of the loan must be secured over the full term of the loan on a first charge basis on any asset owned by either the principal sponsoring employer or any another party.
The value of the security must be at least equal to the face value of the loan (including interest) and there can be no other charge on the asset that takes priority over the charge made by the SSAS.
If the asset used as security is ‘taxable property’, such as moveable machinery, there may be additional tax charges, resulting in most scheme administrators not permitting taxable property to be used as security against the loan.
If this condition is not met, the unauthorised payment is the difference between the value of the security and the amount of outstanding loan.
Loan backs need to be considered carefully and you need to make sure that you are fully aware of the conditions.
To find out how to make the best use of a SSAS pension why not arrange an informal conversation with a member of our team. Call us now on 07834 600024 or email email@example.com to arrange a date and time.