Employer loan conditions
For an employer loan to qualify as an authorised payment, there are five key tests that must be satisfied. These all relate to how the loan is established at the outset.
Therefore, if you are advising clients in this situation, it is important to be aware of the loan criteria, as a failure to satisfy any one of them can lead to unauthorised payment charges.
The criteria are as follows:
- The loan must not exceed the permitted maximum.
- Interest must be charged at a prescribed rate.
- There is a maximum repayment period.
- There are specific repayment terms.
- The loan must be secured on an asset.
Maximum amount of the loan
The SSAS cannot lend out more than 50 per cent of the net asset value of the scheme. This is a one-off calculation that takes place immediately before the loan is granted. It does not matter if the value of the scheme assets decreases later.
There are no limits on the number of loans, but they cannot in total exceed 50 per cent of the scheme’s net asset value.
If a loan exceeds the 50 per cent limit, the value of the excess amount is an unauthorised payment.
Interest rates
When lending money to the employer, the SSAS must charge interest, and the rate of interest must not be less than the prescribed rate. The aim of this to make sure that the loan is being processed on commercial terms.
The prescribed rate is calculated as being 1 per cent above the average of base lending rates for the six main high street banks, rounded up to the nearest 0.25 per cent. Thankfully, this rate is published on a dedicated page on the gov.uk website.
If the scheme charged interest below the prescribed amount, there would be an unauthorised payment. This works on a sliding scale depending on how much below the prescribed rate the interest rate is. For example, if the interest rate is 50 per cent of the prescribed rate, the unauthorised payment is 50 per cent of the whole loan.
Term of the loan
The repayment period for the loan must not be longer than five years from the date of the loan. The loan can be repaid before the end of the five year period, but it can not be repaid after that.
If it is, the unauthorised payment is calculated by dividing the amount of the loan across the number of days in the term and then applying that pro rata to the number of additional days beyond the five-year period.
However, it is possible to roll a loan over for a further five years without it being viewed as an unauthorised payment. If a loan is rolled over, all the conditions of the loan must remain the same.
Repayment terms
This requirement relates to how the loan is repaid. Each loan repayment must include equal instalments of capital and interest and must not be less than the prescribed amount.
