One of the best kept secrets? – The SSAS “Loanback”

by Readers Question

9:49 AM, 27th August 2019
About 7 months ago

One of the best kept secrets? – The SSAS “Loanback”

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One of the best kept secrets? – The SSAS “Loanback”

My personal pension was originally from a high street provider – I transferred my pension fund pot across to my newly created SSAS Pension.

My wife and I created a Limited Company a few years ago specifically for property investment (buy and retain). If this is your strategy then please make sure you set up your Limited Company with the required Industry SIC Codes – these will be required for “SPV” classification

The SPV can borrow up to 50% of the SSAS fund value but it needs to be secured against an asset.

The SPV can then use the loan money to invest in property (our strategy is Buy/Refurb/Re Finance to pull out as much of our original investment as possible)

At the end of the loan period (we use 1 year) the SPV pays the loan PLUS Interest back to the SSAS – the interest amount paid reduces your Corporation Tax Liability (ie it is an expense) and the Interest amount goes into your SSAS tax-free

The benefits for us are:

  • We get to grow our property investments in our SPV quicker
  • Instead of paying “someone else” an interest rate for a loan, the amount remains in “our pocket” ie, it goes into our pension fund tax free

You need to work with an experienced SSAS Provider for guidance

My thought process for the SSAS was twofold really :

We make maximum pension contributions from the PropCo into our SSAS Pension – growing the pension fund

The SSAS pension offers “loanbacks” to PropCo at agreed/approved interest rates – when, paid back, the interest paid is deductible from a corporation tax perspective and is non taxable when paid back into the pension. PropCo can then purchase investments, to which a residential purchase would be allowable. “Rinse and Repeat” annually.

This what my wife have done with our SSAS – making sure to stay within the HMRC guidelines.

My personal belief is that thousands of Property Companies (SPV’s) in the UK can potentially take advantage of the SSAS Pension’s unique flexibility, in particular, family businesses – helping to grow their SSAS Pension fund through tax efficient contributions.

I have collated some basic information that may help if you are considering the creation of a SSAS Pension and utilising the great opportunity of “loanbacks”.

Please do not take this as professional advise – it is purely our own experiences.

Some Basics:

When company directors are talking to their Advisers and Accountants they collectively need to establish:

  • The value of the client(s) existing pensions
  • The value of any new contributions
  • How much of a SSAS Loanback does the company require?
  • What “fixed assets” the company (or the member personally) have to offer as first-charge security?

This type of information will be used by SSAS providers as part of a more detailed review and discussion. (ensuring that you keep within HMRC guidelines)

Some Rules:

To protect the scheme, the SSAS provider will be looking to ensure the company can repay the loan under the SSAS Loanback rules.

There are five key tests that any SSAS loan must meet to avoid tax charges:

  1. A 5-year maximum term
  2. Capital and interest repayments in equal installments at least annually
  3. Maximum loan limit of 50% of the SSAS net assets
  4. Interest rate is at least 1% above current base rate (can be agreed at a higher rate as long as this is on commercial terms)
  5. Security must be in place

First-charge security:

Firstly, the scheme must be protected against loss through the provision of security by the borrower.

No SSAS loan will be completed until the SSAS provider has documentation to confirm that suitable security is in place.

The value of the security must be equal to the amount of the loan plus interest over the full term of the loan and legal input is required to create the binding charge.

Types of Assets:

The assets used as security are often commercial property and land.

These assets are often preferred by most SSAS providers because of the presence of a solicitor who can prevent its sale without the consent of the SSAS and its administrators/trustees.

There is also the very low risk of any tax charges if the loan defaults and the property is moved into the SSAS.

HM Revenue & Customs (HMRC) do not rule out ANY types of assets being used as security in their Pensions Tax Manual.

There are clear warnings that should a SSAS acquire (through calling in the security) certain types of asset (e.g. a residential property), then hefty tax charges will be imposed on the Scheme Administrator and the members.

An understanding of the calling in of security is important and an experienced SSAS provider can help with that.

Some SSAS providers will accept the following assets as first-charge security but, for the above reasons, there are potential tax charges involved:

Residential property (unencumbered!)
Large plant & machinery

Ideally, security should be set up in a way that if the loan were to default it forces the sale of the asset and only the cash proceeds come into the scheme to settles the outstanding loan.

This stops any taxable asset becoming part of the scheme and generating tax charges.

The Scheme Administrators Role:

The formal role of “scheme administrator”, which requires HMRC registration, can be left “holding the baby” in terms of risky investments.

Any tax charges arising from loans made without security in place, or failing to meet the five key tests, are treated as unauthorised payments and tax charges will apply to both the company and the scheme administrator.

Tax charges of up to 55% can apply to the company with additional tax charges on the scheme administrator of up to 40%.

The amount that becomes taxable will depend on the key test that is not met.

In a worst case scenario, the tax charges could be applied to the full amount of the loan and interest due at outset.

Lots of time and energy is required to deal with the reporting and settling of tax charges, hence prevention is, therefore, the key.

SSAS providers can take on the scheme administrator role, taking 100% control of the cash transactions of a SSAS, and leaving the client assured of their protection.

Some people, however, may wish to take on the role of scheme administrator themselves to save on fees, but unless they employ the services of a scheme practitioner they will be left vulnerable in what can be pretty complex territory.

My wife and I have used the above process with our own company and our aim will be have “annual” loanbacks which help our company to acquire more rental properties and at the same time making interest payments back into our SSAS Pension which are tax free.

Very happy to share our own experience/journey.

Regards

Craig



Comments

Richard Peeters

11:57 AM, 27th August 2019
About 7 months ago

Hi Craig, that sounds like it could be very interesting! Just to be sure I have the big picture correct:

1. You have a personal SSAS in place, else set one up by transferring personal funds to it.
2. You have a SPV in place (or set one up), in an compliant line of property-related business.
3. The SPV borrows from the SSAS; the loan is secured and has regular repayments; the loan is used to build up property assets in the SPV.
4. The SPV might borrow more favourably than open market (less hassle, if nothing else); the SSAS earns more from the loan interest than it might otherwise.

What I don't see clearly yet are the tax savings/incentives? And what are the risks/downsides e.g. increased CGT?

Craig M

12:26 PM, 27th August 2019
About 7 months ago

Hi Richard,

I will try to explain.

1. YES - My personal pension was originally from a high street provider - I transferred my pension fund pot across to my newly created SSAS Pension
2. YES - My wife and I created a Limited Company a few years ago specifically for property investment (buy and retain)
If this is your strategy then please make sure you set up your Limited Company with the required Industry SIC Codes - these will be required for "SPV" classification
3/4. YES - The SPV can borrow up to 50% of the SSAS fund value but it needs to be secured against an asset (as per my article).
The SPV can then use the loan money to invest in property (our strategy is Buy/Refurb/Re Finance to pull out as much of our original investment as possible)
At the end of the loan period (we use 1 year) the SPV pays the loan PLUS Interest back to the SSAS - the interest amount paid reduces your Corporation Tax Liability (ie it is an expense) and the Interest amount goes into your SSAS tax-free

The benefits for us are:
We get to grow our property investments in our SPV quicker
Instead of paying "someone else" an interest rate for a loan, the amount remains in "our pocket" ie, it goes into our pension fund tax free

The Risks:
You need to work with an experienced SSAS Provider for guidance- we use SSAS Practitioneer.com

Does that help ?

Richard Peeters

12:38 PM, 27th August 2019
About 7 months ago

Yes thanks it does, and triggers more questions! 🙂

The next step for people like me could be to search through SSAS providers to see what is acceptable, and how to quickly set things up in a compliant way.

It would be great if others who have taken a similar path to yours could also post here with their strategies, and positive/negative experiences … yes, we all understand that none if this should be construed as "Advice".

Craig M

12:56 PM, 27th August 2019
About 7 months ago

Reply to the comment left by Richard Peeters at 27/08/2019 - 12:38
The creation/setup of the SSAS is pretty straight forward and can be completed in a few weeks. The creation of a bank account for the SSAS took a few more weeks. However, the transfer of funds from my original personal pension provider across to the SSAS bank account only took a few days.
For us, there was one clear objective when we selected a SSAS Service Provider, we DIDNT want the provider to be a Trustee. You will find that a lot of providers insist on being a trustee as they will not allow you to do anything without their approval - which is actually good from a HMRC compliance perspective - we have exactly the same from our provider but they are not a trustee.

Richard Peeters

13:14 PM, 27th August 2019
About 7 months ago

May I ask which provider you finally chose?

Craig M

13:20 PM, 27th August 2019
About 7 months ago

Reply to the comment left by Richard Peeters at 27/08/2019 - 13:14
SSAS Practitioner, based in Leicestershire - our experience with them has been great - their help/guidance is continuously received as we pay an annual subscription. We can ask as many things as we like and have access to all of their templates/processes. For us, it is exactly what we were looking for.

Richard Peeters

13:22 PM, 27th August 2019
About 7 months ago

Found 'em, thanks Craig!

Craig M

13:23 PM, 27th August 2019
About 7 months ago

Reply to the comment left by Richard Peeters at 27/08/2019 - 13:22
Your welcome

Peter G

23:02 PM, 27th August 2019
About 7 months ago

Thanks guys. Very helpful. I read somewhere that a ssas pension fund operates only for commercial property not residential. Is this correct, or was the description misleading?

Vero

23:51 PM, 27th August 2019
About 7 months ago

Craig - I’ve used ssaspractitioner.com for my company’s SSAS for around 6 years (I am administrator) & would also recommend them.

Peter - an SSAS is not permitted to OWN several categories of investments, including residential property (or jewellery, watches, boats, cars, wine, crypto, etc - anything that can disappear easily without trace).

An SSAS can, however, loan up to 50% of its net funds/assets to the company so that the company purchases the resi property & repays the loan, + interest, to the SSAS within 5 years.

The loan from the SSAS to the company needs to be secured & this is where the detail matters - the security should be structured so that there is zero possibility of the SSAS inadvertently becoming owner of the resi property, should the security ever be called in.
EG if the resi property is to be used as the loan security, then stipulate that the resi property must be sold if the company defaults on the loan, & the sale proceeds paid to the SSAS to cover the loan.

Mistakes can be costly, if not rectified quickly & openly.

I hope that helps.

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