Focus 128 SSAS Loanback – Case Study
Download PDF SSAS Loanback case study
John and Jane run a successful limited company and are looking to secure finance in order to further expand their business. After discussing their options with their financial adviser, they decide to explore the possibility of borrowing from their pensions by way of a loanback from a SSAS.
John has a personal pension currently valued at £200k and Jane has other pension arrangements totalling £300k.
The adviser recommends that John and Jane establish a Talbot and Muir SSAS, transferring their existing pension arrangements across to the new scheme. They also arrange for all of the relevant paperwork, including a loanback application, to be completed and returned to Talbot and Muir.
Every SSAS is individually registered with HMRC by Talbot and Muir and the turnaround time for approval can vary. John and Jane receive confirmation that their SSAS has been registered after 5 weeks.
As soon as the SSAS is registered, transfer paperwork is sent to the ceding schemes who in turn arrange for the cash transfers to be initiated.
Working in tandem with Talbot and Muir, the adviser makes the clients aware of the following HMRC criteria that must be met when considering a loanback:
- The loanback must be secured throughout its term by way of a first charge over an asset that has a value at least equal to the capital advance, plus interest, payable over the term of the loan.
- Interest Rate. The minimum interest that can be applied must be no less than 1% above the average clearing bank base rate for six nominated high street banks, rounded up to the nearest 0.25%.
- Term of Loan. The term of the loanback must be for a fixed period of no longer than 5 years
- Amount of Loan. The amount of loan cannot be more than 50% of the net asset value of the SSAS at the time of the advance.
- Repayment Terms. Loan repayments must be made in equal instalments of capital and interest for each complete year of the loan.
- Purpose of Loanback. The purpose of the loan must be for bona fide business purposes, and not to enable the sponsoring employer to remain trading in the short term. A loan will not be made to a company that is insolvent. The borrower must use the loan for a business purpose to benefit the borrower’s trade or profession.
- Talbot and Muir also require a letter of comfort from the borrower’s accountant confirming that, in their opinion, the company is in a financial position to be able to meet repayments. John and Jane check with their accountant who confirms they will be able to provide this.
John personally owns an unencumbered parcel of agricultural land, recently valued by a RICS qualified surveyor at £450k, which he is happy to be used as security. Talbot and Muir’s panel solicitor are appointed to put in place a first legal charge on the land.
John and Jane agree to lend £200k, which is within the 50% limit, at an interest rate of 2.5%, for a term of 5 years. A loan agreement is drawn up and the solicitors begin work on putting in place the security.
Once the necessary paperwork has been prepared, and the charge is in place, the loanback is advanced and the following fees paid from the SSAS:
- T&M Establishment Fee: £900 (incl. VAT)
- T&M Loanback Fee: £600 (incl. VAT)
- Estimated Solicitors Fees: £1,020 (incl. VAT)
- Disbursements: £50
- Total: £2,570
A repayment schedule is sent to the borrower with the repayments being reconciled by Talbot and Muir on completion of the year end report. With the cash remaining in the SSAS, the adviser recommends that John and Jane invest in their chosen Discretionary Fund Manager and a Trustee Investment Plan.
John and Jane’s company secures the necessary funding enabling them to further expand their business.
The loan repayments made by their company are classed as a business expense, thereby reducing their corporation tax liability.
Instead of interest being paid to a third party lender, their SSAS receives a regular income stream which helps to build up their pension pots for their future retirement. In addition, all loan repayments received by the SSAS. are tax free
Their pensions remain outside of their estate for IHT purposes.