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

Mark Alexander

10:21 AM, 29th August 2019
About A year ago

Reply to the comment left by Vero at 29/08/2019 - 09:50
Very helpful, thank you.

I suspect the 9.9% rule (which I didn't know about) is the reason that EPUTS are not too well known, because I suspect that would be unpalatable to most property investors, i.e. 'too many chiefs'.

michaelwgroves

8:37 AM, 1st September 2019
About A year ago

Very interesting article
The 5 year loan period could be a pain. What would be the repercussions if you were say 6 months late repaying the loan?
Also, could you bridge for a month and then borrow again for another 5 years?

Craig M

9:12 AM, 1st September 2019
About A year ago

Reply to the comment left by michaelwgroves at 01/09/2019 - 08:37
Hi Michael
5 Years is actually the maximum period - you can arrange the loan for any period up to 5 Years.
Our personal preference is for 1 year at a time - we use the loan to buy a property with cash - refurbish to increase its value and desirability for rent - then we refinance on month 6 - typically receiving the refinance funds in month 9/10 - pay back the loan plus interest before the 12 months is up.
Then we start the process over again !

Adrian

21:07 PM, 7th July 2020
About 3 months ago

Reply to the comment left by Craig M at 27/08/2019 - 12:26
The reason why is this is such a secret is because it is not permitted by HMRC

Under the pension rules, if the SSAS lends money to the company to purchase residential property, the SSAS is deemed to have indirectly invested in taxable property and would incur a penal tax charge.

It's in black and white in the HMRC manual

Vero

22:56 PM, 7th July 2020
About 3 months ago

Reply to the comment left by Adrian at 07/07/2020 - 21:07
Adrian I expect in this instance it migth be allowable - HMRC allows an SSAS to lend working capital to businesses, which may include residential property development businesses. Loan should be repaid when the development is complete/units sold but definitely prior to any letting. This usually refers to a formal property development company but can include "professional flippers"; but excludes traditional buy and hold landlords. I am guessing, in this case, that the refurbishment is carried out within an SPV, or other vehicle, as a development, and refinance complete prior to selling/flipping? If borrowing working capital to develop/refurbish resi property to increase value, but then holding that resi property and letting it post-refinance, I'd probably want to double-check with HMRC first that it still meets the "working-capital loan to a development business" scenario. It sounds a potential gray area to me, so I'd like written approval, just to cover myself.

Craig M

8:41 AM, 8th July 2020
About 3 months ago

Reply to the comment left by Adrian at 07/07/2020 - 21:07
The key to the loanback to the company is the security. In our situation, the loanback was secured against a first charge over our unencumbered home - importantly, it was secured against the "sales proceeds" of our home and NOT the asset.

Adrian

9:32 AM, 8th July 2020
About 3 months ago

Reply to the comment left by Craig M at 08/07/2020 - 08:41
Craig

I'm sorry to tell you that the key to the loan back is not simply thesecurity but the purpose of the loan is important.

I would refer you to the Pensions Tax Manual
https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm125400#IDAVQZMD

I note the relevant sections

An interest in a person is held by another person where they ......
•lend that other person money to fund the acquisition by that other person of taxable property. But certain authorised employer loans are excluded from this provision.

*An authorised employer loan (see PTM123200) made to or in respect of a sponsoring employer is excluded from this provision if:
the property is acquired for........:
•a trade, profession or vocation carried on by the sponsoring employer

I would agree with Vero that if the sponsoring employer is a bona fide trading property development company then that would be the "trade carried on by the sponsoring employer."

However, for the SSAS to lend monies to fund the sponsoring employer's property buy-to let-portfolio (as is implied in the main article and some of the comments) is indirect investment in taxable property and is in breach of the HMRC rules.

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