Sponsoring Employer Loans
For Use By Financial Advisors Only
This note is for general guidance only and is based on our understanding of the current position of the requirements for sponsoring employer loans. It does not recommend a loan as a suitable investment of a pension scheme. Specific advice should be sought in respect of each individual case to ensure that the requirements of HMRC and relevant legislation are being met.
Sponsoring Employer Loans Background
Historically, one of the major benefits of SSAS pension schemes was the ability for Trustees to lend money to the Principal Employer, provided the Trustees deemed it a prudent decision. This allowed fairly straightforward access to business funding, with the advantage that loan repayments would be made back into the pension fund rather than to an external lender like a bank.
While such loans can still potentially serve the dual needs of the business and the pension scheme, there are now a number of strict legislative requirements that apply.
Amount of the Loan
Any such loan is limited to only 50% of the total net assets within the pension scheme, calculated at the point when the money is released. Exceeding this 50% cap would make the excess an unauthorised payment subject to tax penalties.
The loan must be secured by having a first charge set against an asset that equals or exceeds the total initial loan amount plus all the interest that will accrue across the entire term. While this security asset does not have to be owned by the Sponsoring Employer itself, care must be taken if it constitutes taxable property. Setting charges over tangible/movable/residential property can lead to tax charges if that charge ever has to be enforced.
Where company assets are offered as security, any existing debentures or charges on those assets need to be researched first. They may affect the company’s ability to use those assets as compliant security. Existing debentures can be varied or removed with the agreement of relevant parties, but this can significantly impact timescales. Missing the 21-day deadline for registering a new charge at Companies House would make the associated loan an unauthorised payment.
Loan term and interest
The maximum term allowable is 5 years from the advance date. The interest rate must be at least 1% above the average base rate of the 6 leading UK retail banks, rounded up to the next 1⁄4 percent. An agreement can instead specify a fixed interest rate. Equal combined repayments of capital and interest must be made annually over the term – interest-only loans are not permissible.
Where the initial 5-year term expires with outstanding monies still owed, it may be possible to roll over the balance for one additional 5-year term. The loan agreement must clearly capture the prescribed basis of capital/interest repayment for the loan to be fully compliant.