SSAS providers in employer loanbacks warning

Employers who run occupational small self-administered pension schemes (SSAS) have been warned about the tax implications of using encumbered assets as collateral when they take loans from their schemes.

The issue has been pushed into the limelight recently as some SMEs have been forced to borrow from their pensions because of difficulties raising business loans from banks.

Founder employers are able to borrow money from the pension fund, provided that they offer an asset as collateral. However, if an employer then defaults on the loan where an encumbered asset has been given as security, the trustees could face a tax charge of up to 55% on the asset when they receive it.

Assets such as plant and machinery, book debt, company shares and fine wine collections could leave trustees subject to these charges.

Martin Tilley, pension consultant at Dentons, explained: “If the trustees acquire plant and machinery, they are holding a taxable asset which will immediately incur a tax charge on the trustees.

“It is far too easy for a conflict of interest to exist with member trustees where loans are concerned, but it is the role of professional trustees to ensure all the features of a potential investment are explored.”

Tilley warned that using the residential property of the employer or another member could also be risky, as if the collateral is needed, trustees would be placed in a situation where they may have to order evictions.

Murray Smith, sales and marketing director at Mattioli Woods Pension Consultants, said up until 2009, taxable property was dealt with when the loan was granted. This  meant tax was paid only on the services needed to set up the security, such as legal fees. However, tax is now paid on the asset when it is received by the trustees. “It is not very helpful when trying to encourage business,” Smith said.

“We will do this, but only when clients understand the full implications. Sometimes it is a case of needs must, but we look at other options, such as the pension fund buying assets from the company and then leasing them back. We could do with a little more flexibility from HMRC. Is a security really necessary?”

Andrew Roberts, partner at Barnett Waddington, said: “We act as advising trustees for our clients, but member trustees are responsible for their investments.
“Residential property should not really be used as security as it can cause many problems. We do not ban this outright, but we do not encourage clients to use this type of asset as security.”

A spokesperson for HMRC said: “These protections help safeguard the scheme funds and ensure that tax-relieved funds are available and used as primarily intended by Parliament, to provide pensions for employees.

“These restrictions are a necessary balance. Although loans to an employer from the pension scheme it sponsors may provide a useful source of business funding, they may lead to liquidity problems for the scheme if, for example, there were a sudden requirement to provide scheme benefits.

“Such loans are therefore only acceptable if they are genuine pension scheme investments, in which case they should be prudent and secure and deliver commercial returns on the monies invested.”