RP case studies: When the bank says no a SSAS can help

In the latest RP case study, Martin Tilley looks at the advantages SSAS can offer to business owner clients when the banks won’t play ball…

A recent new case has highlighted the advantages that creative use of a small self-administered scheme (SSAS) can offer.

We were recently appointed to a scheme, which was attached to a manufacturing business.

The business had been through hard times in recent years and when the opportunity to purchase the premises from which it traded three years ago, could not have come at a worse time.

The directors of the firm approached its high street bank, via their small business adviser but the bank had been unwilling to assist, pushing the company towards securing finance with a second tier lender whose terms were well above the major bank’s normal lending rates.

Despite being saddled with hefty monthly repayments, a restructure of the business, promotion of a lead business developer to board level and the appointment of a financial controller has seen the business turn round into profitability.

The company has been able to extend the building and now faces the need to invest heavily in equipment, which will enable it to bring in house, manufacturing of parts, which it currently buys in.

The company’s banker has assisted with factoring but are unwilling to lend further since their only security was the property, which was already charged to the second tier lender.

What to do

The adviser prosed two solutions:

  1. A SSAS loan back to the sponsoring company but this was thwarted by a lack of first charge security. The company’s premises already being charged to the second tier lender.
  2. Part purchase of the company’s premises

Working with the adviser, the business decided to undertake the second option, which was achieved as follows.

The property was formally valued by a RICS qualified survey at £1m.

The outstanding debt with the second tier lender was around £420,000. The surveyor indicated an open market rental value of the property would be £74,000 per annum.

The SSAS held assets only for the company shareholder in the sum of £220,000.

The newly promoted director was offered membership of the scheme and brought with him, pension transfers amounting to £80,000. The financial controller was also offered membership of the scheme and brought with her transfers of £50,000.

Specialist lender

The adviser handled the transfer process and arranged through a specialist lender, knowledgeable in the self-invested personal pension (SIPP) and SSAS market, a mortgage for £175,000, being 50% of the value of the SSAS.

The rates from the new lender were arranged on competitive terms, being only on a loan to value of 33% of the asset to be acquired.

The SSAS has effective buying power of £525,000 which taking into account the costs of acquisition meant that it could acquire a 50% interest in the property, which it now jointly owns with the company.

The proceeds received from the sale of its 50% share of the property are used by the company to redeem its borrowing from the second tier lender, who at that time released the charge on the property.

Although that charge was replaced by a new charge from the new mortgage lender, the charge restricts recourse to the proportion of the property owned by the pension scheme. The company’s proportion remains unencumbered.

The company enters into a lease for the proportion of the property owned by the pension scheme and pays £37,000 a year into the pension scheme, which uses this tax-free rental income to service the mortgage debt.

Surplus proceeds

The company is able to use the surplus property proceeds over the original mortgage debt repayment to invest into the machinery needed to commence its manufacturing of parts, thus bringing in-house a product which is was having to buy in and provide profit to a third party.

It is also freed from its expensive mortgage debt and the new rental repayments are now lower than its previous monthly expenditure. The rental payments are now being channelled as a tax efficient trading expense into a vehicle where the senior employees benefit from it rather than them being lost in interest to the second tier lender.

The last positive to the process is that the two senior employees offered membership of the scheme are now even more fully engaged with the business and their loyalty has been recognised and rewarded by the company’s owner.

Martin Tilley is director of sales and marketing at Dentons Pension Management