A SSAS can indeed lend money, however HMRC sets strict conditions on the nature of any loans issued. It’s very important to be clear on these in order to avoid costly mistakes.
So, what sort of loan can a SSAS provide?
Who can a SSAS loan to?
A Small Self -administered Scheme (SSAS) pension can lend money to the sponsoring employer (the employer that established the scheme and pays contributions into it), or a company or individual unconnected to the scheme.
Being clear on what constitutes a ‘connected party’ to the scheme is vital as loans to connected parties are heavily discouraged by HMRC.
HMRC defines connected parties as those who are existing members of the scheme or relatives or spouses of a scheme member, partnerships whereby an existing scheme member is a partner, or employers who are solely or jointly under the control of a member of the scheme.
When loaning to unconnected parties there are fewer restrictions in terms of the size of the loan, however it must be ensured that the loan is not intended to be used for the purchase of taxable property like vehicles, residential property, jewellery, fine art, or yachts.
What about the size of the loan?
For loans to the sponsoring employer, the loan must amount to no more than 50% of the net value of the pension. This must be net of any existing loans that the SSAS may have, such as commercial property mortgages. Any loans made that are larger than the net value of 50% of the scheme’s assets will be charged a large tax penalty by HMRC.
The amount is different when lending to unconnected parties. In these cases, the SSAS may lend up to 95% of its net asset value, ensuring that it is secured by a first charge on an identified asset.
Securing the loan
Any loans made by the SSAS must be secured on an asset equalling or surpassing the value of the loan.
This criterion is often the most challenging. Any asset used to secure the loan must be independently valuated, have a real value and must meet or exceed the value of the loan, plus interest accrued over the loan term. Additionally, said asset must be non-depreciating.
Examples of the sort of assets normally used include commercial property, business assets like stock, land or investment portfolios.
Interest and duration
The loan must have a maximum term of 5 years and must be fully repaid (interest included) by the end of the term. Repayments must be equal instalments issued on a monthly, quarterly, bi-annual or annual basis.
When it comes to the rules on interest this must be charged at a rate of at least 1% higher than the Average Base Rate of the 6 leading High Street Banks. That said, a higher rate of interest may be agreed by the SSAS if it so wishes.