Sisters, Kerry and Jessica, run their property consultancy business as a limited company, of which they are the only shareholders and directors.
It has been trading successfully for over a decade and it has never needed to avail itself of any borrowing; Kerry and Jessica were fortunate enough to be in a position to start the business with the assistance of some savings and limited overheads, as their parents gifted an office property (worth £300,000) to them to trade from.
Over the years, they each have been able to save into personal pensions and have accumulated funds of £250,000 between them.
They have also taken financial planning advice over the years from their friend and qualified financial adviser, Anna. Indeed, it has been as a result of Anna’s advice that they have their personal pensions in place. It is to Anna, then, that they turn when they identify a need for some financing for an expansion of their business.
Anna outlines a range of potential options that might be considered when it comes to arranging finance for a business. One of these is an option for Kerry and Jessica to utilise their accumulated pension funds to help with the business expansion; a loan from a small self administered scheme (SSAS) to their company. Intrigued that their pension funds could help in this way, Kerry and Jessica ask Anna to outline how this could work in practice.
Anna explains that, unlike their personal pensions, a SSAS is an occupational pension scheme created by an employer for selected directors / employees of the business.
Immediately, they realise that they would qualify as members of a SSAS created by their own limited company.
Anna further explains that, although it is not a legal requirement, a professional independent trustee should be engaged to provide the framework for the scheme and also to take on the roles of co-trustee, joint signatory and joint Scheme Administrator (an official role required within Registered Pension Schemes). Anna stresses that an experienced independent trustee can help avoid any mistakes being made within the scheme, mistakes which could in turn cause tax charges to apply.
Anna confirms that it can take several months to have a new SSAS accepted and registered by HM Revenue & Customs (HMRC), but that once this has happened, monies can be transferred-in from the personal pensions and used to create the loan to the founder employer. Anna points out, however, that there are strict conditions (laid down by HMRC) that apply to such loans –
- Maximum amount of loan – 50% of the net asset value of the SSAS, including any existing loans to employers
- Interest rate – at least 1% above the average of 6 leading high street bank base rates, or some other demonstrably commercial higher rate
- Repayments – equal instalments of capital and interest payments, paid at least quarterly
- Maximum term – 5 years from the date the loan was advanced
- Security – a First Legal Charge over a suitable asset or assets of at least the equivalent value of the loan plus interest
Anna stresses that, should any of the above conditions not be met, unauthorised payment tax charges could apply. In addition, Anna discusses with Kerry and Jessica the importance of the security for the First Legal Charge, and assets that might be considered for this purpose.
Anna points out the potential implications if a SSAS loan to employer cannot be fully recovered in the event of default by the borrower; any loan / interest not capable of being recovered becomes an unauthorised employer payment and subject to tax charges. If the employer cannot pay the tax charges, these then revert back to the SSAS to be covered from there.
Anna strongly urges Kerry and Jessica to make the unencumbered office property available as the security, as opposed to, say, shares in their company, any plant and machinery, intellectual property and so on.
Kerry and Jessica remind Anna that the office property is owned by them as individuals rather than by their company. Anna explains that this is not a problem in practice because the security for the loan need not be owned by the borrower.
In the fullness of time, the new SSAS grants a loan of £125,000 to their company, with the security taking the form of a First Legal Charge over the office property, and the business expansion proceeds as planned.
Stephen McPhillips is technical sales director at Dentons Pension Management