Adviser > Technical Central > Pre simplification > Occupational > Pensions Update 143
Pensions Update 143
The content of this page is based on our understanding of how pensions worked before A-Day, the 6 April 2006, and is provided for reference only.
Pensions Update 143 clarifies existing Her Majesty's Revenue and Customs (HMRC) practice on loans made by trustees of a SSAS to employers under parts 20.52 to 20.61 of the IR12 PNs and reaffirms the following:
- trustees' investments in loans are restricted to shares in an employer company (or associated company). Loans include debentures and loan stock issued by the employer or an associated company
- during the first 2 years from the date the scheme was established, self-investment must not exceed 25% of the market value of the assets of the scheme derived from direct contributions (i.e. not transfers in) made by the employer and scheme member(s). This limit is increased after 2 years to 50% of the market value of all the assets of the scheme at the date the loan was taken out. The 25% or 50% limits must exclude any portion of funds notionally underpinning retired member’s, ex-spouses’, widower’s/widow’s or dependants’ benefits in payment where the purchase of an annuity has been deferred. Funds for prospective widowers/widows of retired members whose pensions must also be secured at the same time as the retired member must also be excluded from the calculation of these limits
- loan agreement procedures have been clarified and all agreements must be evidenced by written agreement and allow the loan to be repaid immediately if the borrower:
- is in breach of the conditions of the loan agreement
- ceases to carry on in business
- becomes insolvent
- is in breach of the conditions of the loan agreement
- HMRC assume the date of the loan to be the date the money actually passes from the lender to the borrower. Every payment actually made under an agreement must be documented and reported separately to HMRC and must satisfy all requirements at the date of payment
- loans in tranches - a loan facility agreement does not have to be reported until the first sum of money has been advanced under the agreement (using form PS7013). In some cases money is advanced in more than one tranche - each tranche must now be separately documented and reported
- loans must be for a fixed term, which should be realistic and agreed between both parties. The duration of the loan should be commensurate with the purpose for which the money is borrowed. Loans such as 364 day loans are not acceptable where the employer will not repay the loan for, say, 3 years
- tax on loan interest paid by the employer - there is no requirement for the borrowing company to deduct tax from interest paid on or after 1 October 2002 in respect of a loan made by a SSAS, regardless of when the loan was made
- loans should be prudent - HMRC require scheme trustees to act in the best financial interests of the scheme members in their capacity as scheme members and not as employees, shareholders etc.
- a loan should be fully commercial - HMRC will take into account the following in determining whether a loan is commercial:
- the rate of interest payable must be at a commercial rate. The rate will not be questioned if it is at least 3% p.a. above the Clearing Banks Base Rate (CBBR) for both secured and unsecured loans. A rate of interest of less than this will only be accepted if written evidence can be produced demonstrating that the borrower can obtain a loan on similar terms from an arm's length institution
- HMRC view loans that are repayable at least quarterly on a capital and interest repayment basis as commercial whereas on an interest only basis this would be viewed as non commercial
- the rate of interest payable must be at a commercial rate. The rate will not be questioned if it is at least 3% p.a. above the Clearing Banks Base Rate (CBBR) for both secured and unsecured loans. A rate of interest of less than this will only be accepted if written evidence can be produced demonstrating that the borrower can obtain a loan on similar terms from an arm's length institution
- form PS7013 must be certified by the scheme trustees (excluding the pensioneer trustee) to document that they are satisfied that the loan is a prudent investment
- scheme trustees are expected to disclose all material facts relating to the financial strength of the borrower at the time a loan is made
- any loan made which in the opinion of HMRC is not deemed a prudent investment will result in HMRC writing to the trustees stating why this is not prudent and giving the trustees the opportunity to rectify the matter
- money loaned to an employer must be utilised for the purpose of the borrower's trade or business and must be used to benefit the trade or business. This must also be clearly documented on form PS7013. If the reason for borrowing is to buy trading stock this must be stated on the form. If the loan is not used for the purpose stated penalties may apply and scheme approval may be withdrawn
- where the borrower is experiencing difficulty in repaying a loan, it will be unlikely that HMRC will allow the loan to be converted into shares in the company as this increases the scheme's exposure to possible bad debts. Despite this, any request to consider a refinancing package of this nature must be supported by the most recent audited accounts of the borrower and an independent professional valuation of the market value of the shares that the SSAS is prepared to accept in place of the loan. Both the market value and prospective nominal value of the shares will also be required. The Trustees should not attempt to accept such a refinancing package without obtaining independent professional advice. A copy of this advice must then be sent to HMRC with any proposal to replace the loan with shares. Loans may not be "rolled over" more than twice. Any attempt to avoid these requirements may jeopardise a scheme's approval
- loan defaults - the Trustees must ensure that the borrower honours the terms of the loan agreement fully. Trustees should ensure that they pursue the payment of arrears promptly. The scheme administrator should inform HMRC within 90 days of a loan default occurring and confirm the amount of capital and interest outstanding. Within a further 90 days of notification of default the scheme administrator must notify HMRC of all steps taken to recover the debt and supply documentary evidence confirming the steps taken. Failure to do so may jeopardise the tax approval of the scheme
A copy of Pensions Update 143 can be accessed by clicking on the link below:
A copy of the IR12 PNs can be downloaded from HMRC website using the link below:
Updated 6 July 2005
For professional advisers only
