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

by Readers Question

9:49 AM, 27th August 2019
About A year 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


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Comments

Craig M

8:21 AM, 28th August 2019
About A year ago

Reply to the comment left by Peter G at 27/08/2019 - 23:02
Hi Peter
Your SSAS Pension can own assets that give a commercially viable return - such assets are commercial property, land etc.
IT CANNOT DIRECTLY OWN RESIDENTIAL PROPERTY.
Please note there is a distinction here as we are talking about the SSAS Pension actually owning an asset.
In my original post we were NOT talking about the SSAS Pension owning any residential property - it was only loaning money to its sponsoring company (SPV).
Does that help ?

Craig M

8:26 AM, 28th August 2019
About A year ago

Reply to the comment left by Vero at 27/08/2019 - 23:51
Glad to hear that your experience with SSAS Practitioner has also been a good one Vero.
You have also explained the "loan security" aspect very well, ie, the security is over the "sale proceeds" of the residential property, not the property itself - Thank you.

Richard Peeters

8:47 AM, 28th August 2019
About A year ago

Reply to the comment left by Vero at 27/08/2019 - 23:51
"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."

This is a important distinction and a big foot in the resi door. Vero, is that a rule for *all* SSAS schemes, or specific to some providers?

Craig M

9:20 AM, 28th August 2019
About A year ago

Reply to the comment left by Richard Peeters at 28/08/2019 - 08:47
My understanding is that it is a HMRC Guideline, so it would be applicable to ALL SSAS Schemes - falling outside of the HMRC Guidelines could have a massive tax implication

Vero

16:54 PM, 28th August 2019
About A year ago

Reply to the comment left by Richard Peeters at 28/08/2019 - 08:47
Richard - SSAS schemes are regulated by The Pensions Regulator (SIPPs are regulated by the FCA). Ultimately it is HMRC regulation that restricts how and in what an SSAS can invest. The HMRC rules apply to all.

Once your company has its own SSAS, if you elect to be a scheme administrator, then it is pretty much up to you to make your own investment choices, in line with HMRC rules (in that case, I think Craig and I would both recommend using SSASPractitioner.com as your practitioner).

A good starting place for more information is the Resources section on the SSASPractitioner.com website.

Best of luck.

Vero

17:29 PM, 28th August 2019
About A year ago

I have to agree with Craig - there are so many benefits for companies in establishing an SSAS pension scheme.
An SSAS is more flexible and allows much greater control than a SIPP, or other personal pension scheme.
Existing personal pensions can easily be transferred into an SSAS.
A popular use is to sell the company's commercial premises to the SSAS, and rent it back to the company. If necessary this can involve a mortgage for the SSAS (up to 50% of the SSAS' value). Rental income earnt by the SSAS is not taxed.
Alternatively, as in the main thread, the company can borrow from the SSAS, again up to 50% of the SSAS' value, and keeping within HMRC rules.
Interest earnt by the SSAS is not taxed.
Contributions into the SSAS by the company are valid corporation tax deductions. SSAS running costs (practitioner, IFA, legal fees etc) are also valid corporation tax deductions, if paid by the company (optional, can also be paid from SSAS funds instead). Ditto VAT on these payments, if VAT registered.
An SSAS is an occupational pension scheme and can have up to 12 members; this can allow for pooling into a much larger sum to work with.
There are many other investment options for the SSAS, to me the main benefit is the flexibility to invest as and when I want, with the practitioner as a sounding board, who also prepares the annual scheme accounts for HMRC, and generally has my back. And of course, it is so tax efficient.

Mark Alexander

8:50 AM, 29th August 2019
About A year ago

Hello All (and especially Craig)

Has anybody commenting here looked into EPUTS?

My currently limited understanding of these Unit Trusts is that they can own and let residential property and that SSAS and SIPP pension funds can own shares in them. Furthermore, because the EPUT would be owned by the pension scheme, the tax advantages of the pension scheme would still apply.

I might be wrong about the above, but that's what my investigations into this model seem to reveal at this stage, so it is something I would like to explore further.

I'm just catching up on this thread and haven't read all comments yet, so apologies if this has already been raised.

If anyone here does know anything about EPUTS though, please share your knowledge.

Thanks in advance

Mark A

Craig M

9:07 AM, 29th August 2019
About A year ago

Reply to the comment left by Mark Alexander at 29/08/2019 - 08:50
Hi Mark
I'm afraid that I have zero experience with EPUTS so not in a position to offer any useful guidance, however, if you go to sippclub.com and search for "how-to-hold-residential-and-commercial-property-in-a-pension" you will find some great EPUT information that should help you.
Regards
Craig

Mark Alexander

9:47 AM, 29th August 2019
About A year ago

Reply to the comment left by Craig M at 29/08/2019 - 09:07
Thanks Craig

I'm not buying any more property personally so my question was more out of curiosity than anything. Also, if anybody does know more about this it could be very helpful to other Members (and possibly yourself) of they were to share what they know and better still their experiences.

Vero

9:50 AM, 29th August 2019
About A year ago

Reply to the comment left by Mark Alexander at 29/08/2019 - 08:50
Hello Mark.

Yes, shares in Exempt Property Unit Trusts (and REITS), can be held by SSASs and SIPPs.

As expected though, HMRC set out strict rules for EPUTS when they hold resi property, as they see this as indirect holding of taxable property.

If the EPUT invests in residential property it needs to be established and operated as a "Genuinely Diverse Commercial Vehicle", as defined by HMRC pension tax rules.

Dentons have summarised GDCV here:
https://www.dentonspensions.co.uk/Investments/Genuinely-diverse-commercial-vehicles/

If an EPUT holds any residential property, no SIPP or SSAS, either alone or together with one or more associated persons, may hold or have entitlement to more than 9.9 per cent of the units in the EPUT. This means an EPUT needs to be invested in by at least 11 investors who are unconnected, with any connected/associated investors limited to 9.9 per cent collectively.

I think it's easy to be scared off because the general subject is not well known, but it's not overly complicated and in these days of the internet, the information is now freely available to all, so can be demystified.

(General caveat - there is always the chance of legislation changing and/or a change of government, particularly with the current opposition and also the new territory the UK is currently in. The old rule of thumb of not letting the HMRC tail wag the dog too much applies).

The beauty of an SSAS is that you don't have to have a restrictive "pension operator" run or oversee the scheme, you can more or less run it yourself, with a practitioner there when you need them to run things past, etc (again, ssaspractitioner.com is great at this, also very reasonably priced). As long as you are both happy that you meet all HMRC rules at all times, you can pretty much do your own thing.

I hope that helps.

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