Loan-back conditions
As mentioned above, a loan back can only be made from certain occupational pension schemes to their sponsoring employers. In practice, this will mean they can only be made from a Ssas because a Sipp is not occupational and therefore doesn’t have a sponsoring employer, even if there is an employer paying contributions.
Since A-Day (6 April 2006) it has been possible to make such a loan for any purpose, and this offers greater flexibility than was previously the case. A-Day also saw the end to all rules relating to how long a scheme had to be established before a loan back could be made. This means that an individual can, for example, transfer a number of personal pension arrangements into a Ssas with the Ssas fund being available immediately to justify a loan back to the sponsoring employer.
HMRC sets out five criteria that all need to be met for a loan back from a Ssas to be treated as an authorised employer loan:
Security
The loan must be secured as a first charge on assets that are at least equal in value to the loan plus the interest due over its term. Subsequent falls in the value of the security are permitted, provided these are not the result of actions taken by the employer or connected persons. The charge must take priority over any other charge on the assets.
Where a charge is taken over company-owned assets this must be registered with Companies House within 21 days. What these assets are isn’t necessarily an issue, but it should be borne in mind that the asset could be claimed by the Ssas or need to be sold should the loan not be repaid. If the Ssas placed security on a residential property, then it wouldn’t be able to take that into the scheme if the loan isn’t repaid – it would need to be sold, which might prove a serious issue for the resident.
Interest rate
The loan must have a minimum interest rate equal to the average of the base lending rates of the six leading high street banks, plus 1 per cent. Where the average is a multiple of 0.25 per cent, this will be the rate. Where it is not such a multiple the average should be rounded up to the next multiple of 0.25 per cent.
HMRC is happy for a loan to be established using a fixed rate of interest, and as long as the terms of a loan remain unchanged there is no requirement to alter the interest charged on a loan during its life. This is the minimum rate but a higher rate could be applied. A higher rate isn’t likely to benefit the company, only the pension. This could be an issue should there be a problem with repaying.
