In his latest column for SIPPs Professional, SSAS and SIPP expert Martin Tilley, WBR Group's chief operations officer, looks at SSAS loan backs.
Small Self-Administered Schemes (SSAS) have seen their popularity increase again, becoming popular among business owners and directors seeking greater control over their retirement savings.
SSAS are often misunderstood by many and are also vastly underrated.
They provide great flexibility and control for their members. It is this control, over all aspects of the scheme (as compared to a SIPP which must often follow the parameters and constraints of the SIPP Provider) which is so appealing. However, the members who will also be trustees may also be directors and shareholders.
A combination of between two and four hats can be worn at any given time and it is critical to understand which one they should wear when considering transactions, particularly those that relate to connected parties.
One of the unique features of SSAS is the loan back facility, which allows the founder or associated employer to borrow money from their SSAS for commercial purposes.
The advantages are clear: for the company, avoidance of the long wait for the credit committees of the major lenders and for the directors the payment of interest effectively into another pocket of their own wealth?
A loan also permits monies to be paid in from the company which are “investment returns” and therefore on top of any annual allowance contributions the members might enjoy. For the trustees/members a loan which provides a fixed interest yield is secured and this income could be used over its term to cover regular member pension payments.
Sounds too good to be true? It could be - which is why there are criteria and parameters which need to be considered, and met, for a loan back to be a secure and sensible investment.
Some of these criteria are set by legislation and must be adhered to in order to prevent the payment to the employer being treated as an unauthorised payment, with all the tax pain which that would trigger. These criteria are that a maximum of 50% of the net scheme value can be loaned back, that the term cannot exceed five years and that interest and capital should be repaid over the term of the loan in equal instalments.
Security should also be by way of first charge. There are however areas that contain variables: the rate of interest, what asset(s) are offered as security and another, the maintenance of the loan over the term.
Starting with the interest rate, a minimum of bank lending base rate plus 1% is required, but in today’s market can that really be categorised as commercial? This is where parties wearing differing hats will have separate views on setting the rate of interest.
A director/shareholder of the business may wish to set the interest rate at the lower end of the commercial range of interest, thus minimising the liability of the company. While a member who is not a shareholder might prefer to see the return on investment at the higher level of the commercial range of interest. However, in fact both parties, wearing their trustee hat and with those fiduciary responsibilities to their members’ best interests, should be offering the facility to the borrower on terms that are of their choosing. The company can choose to accept or decline the trustees’ offer.
In practice, there should be a compromise which all parties are happy with. Pre-A Day, HMRC was often known to accept base rate plus 3% without question, but no such implied acceptance criteria exist now. In many cases the only means of setting a truly evidenced commercial rate of interest is to duplicate an offering from a third-party lender on identical terms.
The second area is the choice of what asset is secured on the borrowing. This must be a first charge and must be proven to be a value to cover the borrowing amount and interest for the term of the loan. Again, a trustee who has a personal interest in the asset might be less likely to offer it for security or insist on calling in that security in the event of default.
The third area in which members might need to be reminded of their trustee hat and responsibilities, is if the borrower should default on one or more scheduled repayments. There might be a tendency for a director/trustee to ignore a late or missed payment or two, but that of course would be a breach of fiduciary responsibilities and there of course comes a time when the full effects of default, including the calling in of security, might come to pass.
It is here that the role of the independent trustee will come to the fore, in reminding those individuals which hat they should be wearing and how conflicts of interests must be managed and avoided. The consequences of not complying with the loan documentation and maintaining the commercial terms between the SSAS and the employer will of course benefit no one other than the Treasury’s coffers through unauthorised payment tax penalties.
Provided each party recognises their role as trustees of the SSAS, and remembers to put on the right hat for the occasion, a loan back can be a useful tool for benefit of all parties.
Martin Tilley is chief operations officer at WBR Group
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