A loan must not be more than 50 per cent of the net asset value of the scheme. This is assessed at the point immediately before the loan is made.
This is a one-off test. If the net asset value later drops such that the outstanding loan amount comes to more than 50 per cent, it will not create an unauthorised payment.
However, if the scheme makes a further loan, there is a further test of the 50 per cent limit. This takes into consideration outstanding loan amounts and the net asset value at that time.
If the 50 per cent limit is breached, the unauthorised payment amount will be the difference between the total value of the loan(s) and 50 per cent of the net asset value.
Term of the loan
The term of the loan must not be longer than five years from the date of the loan.
However, if a sponsoring employer faces financial difficulties, the legislation allows the Ssas to roll the loan over for a further five years.
Where a rollover takes place, the terms of the original loan must stay the same. The rolled over loan will not be treated as a new loan, so it will not need to be tested against the 50 per cent limit, and any existing security can continue to be used.
If the term exceeds five years, the unauthorised payment amount is calculated by dividing the loan amount across the number of days in the term then applying that pro rata against the number of days by which the term exceeds five years.
Interest rate
The Ssas must charge interest on the loan of at least 1 per cent above a specified interest rate. This is to ensure a commercial rate of interest is being applied to the loan.
The specified rate of interest is based on the lending rates of six leading high street banks rounded up to the nearest 0.25 per cent.
Helpfully, HMRC publishes the rate on the following web page under the heading ‘Other Corporation Tax Self-Assessment interest rates - Interest charged on underpaid quarterly instalment payments’.
If the interest rate is lower than the prescribed rate, the unauthorised payment is calculated by applying the shortfall on a percentage basis to the loan amount. For example, if the rate used is 10 per cent lower than the prescribed rate, the unauthorised payment is 10 per cent of the loan.
Repayment terms
The loan must be repayable in at least equal instalments of capital and interest. It must also be payable at least annually.
This means that one fifth of the capital and interest must be repayable as a minimum by the end of year one, two fifths by the end of year two and so on.
