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Small Self-Administered Scheme - Self Investment
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.
What is self-investment?
One of the popular features of a Small Self-Administered Scheme (SSAS) has been the ability to purchase company shares and lend money to the company. This includes the ability to lend money or purchase shares in an associated* company, whether or not that employer participates in the scheme. This feature is called self-investment.
How much money can be used?
There is a 5% limit on self-investment unless certain criteria are met - all members must be Trustees, and the Rules of the scheme should state that they must agree in writing to any self-investment. Assuming that this criteria is met, during the first two years of the scheme the amount of self-investment may not exceed 25% of the market value of the assets of the scheme excluding:
- any transfers received from other schemes
- any assignments from other schemes
- any portion of the funds which notionally underpin retired, widow(er), ex-spouse or dependants’ benefits in payment where the purchase of the annuity has been deferred, and
- any sums borrowed to purchase scheme assets which are outstanding at the time the loan is paid and any other liabilities incurred by the Trustees which are outstanding at that time.
When the scheme has been in force for more than two years 50% of the market value of the scheme assets can be used.
There are additional restrictions placed on the Trustees where the scheme operates under Rules which allow the Trustees to defer the purchase of an annuity for a member or dependant to age 75. In such cases the following also applies:
- if a member/dependant is in receipt of a deferred annuity the Trustees may not make any new self-investment or purchase any unquoted shares. The Trustees must also ensure that any existing self-investment is repaid within 5 years of the last member’s or dependant’s annuity commencing
- where the scheme has active and pensioner members the share of the fund attributed to the pensioners must be excluded from the fund value when calculating the maximum available for loanbacks and the purchase of unquoted shares
- where the purchase of an annuity has been deferred, the money necessary to purchase the whole annuity must be available no later than:
- the earlier of 5 years after the annuity payments started and
- the pensioner reaching age 70.
Loan to the company
Considerations
There are several things to be considered by the SSAS Trustees before they proceed with a loan:
- the loan must be paid out of scheme funds
- the loan must be for a fixed term which should not be longer than is necessary and a commercial rate of interest (normally 3% above the Clearing Bank Base Rate) must be paid by the company to the scheme Trustees
- the loan may only be made for genuine business purposes and must be used to benefit the borrower’s trade or profession. The loan cannot be paid for purely speculative purposes such as the purchase of other investments
- it is acceptable for a loan to be used to pay off a company’s overdraft, as long as the overdraft was incurred for bona fide commercial purposes and not just to add to the company’s cash flow
- as the loan comes from funds held within the scheme, consideration should be given to the need for liquid funds under the scheme e.g. so that retirement benefits or death benefits can be paid. If the scheme does not have sufficient liquid assets available, insured benefits would need to be surrendered and these may be subject to withdrawal charges
- the Trustees must be seen to act in the best interests of the scheme members. If this regulation is breached the exempt approved status of the scheme may be withdrawn. Some examples of this are:
- loans paid solely to keep an ailing business afloat
- loans to employers who are technically insolvent
- failure to take all legal steps open to them to enforce the repayment of the loan.
Loan agreement
For all loans there must be a written agreement which has to state that the loan will be repaid immediately if the borrower:
- is in breach of the conditions of the loan agreement
- ceases to carry on business
- becomes insolvent.
Loans paid in stages
In some cases loans are paid in more than one stage. Each sum of money lent under such an agreement must be separately documented and reported to Her Majesty's Revenue & Customs (HMRC).
Repayment terms
It is very important that any loan is on a commercial basis and that no preferential terms are being offered to the borrower. Where a loan is made on an ongoing repayment basis with capital and interest being repaid at least quarterly, this will be a factor pointing to the loan being commercial.
On the other hand, interest only loans, where capital is not repaid until the end of the loan term, or loans permitting capital/interest to be paid annually may be an indication that the loan is not on a commercial basis. HMRC will be prepared to consider a loan on these terms only if written evidence is produced demonstrating that the borrower can obtain a loan on similar terms from a bank or other financial institution. The evidence has to show that they would be prepared to lend the same amount of money over the same period of time as is proposed for the SSAS loan.
Loan defaults
It is the duty of scheme Trustees to ensure that, where they lend money, the borrower honours the terms of the loan agreement fully and completely. Trustees should ensure that they pursue the payment of any arrears promptly and effectively. The scheme administrator will be required, within 90 days of a loan default occurring, to notify HMRC in writing of any default where the defaulted interest/capital has not been paid/ repaid in the interim. Within a further 90 days of the notification of a default occurring, the scheme administrator will be required to notify HMRC in writing of the steps the Trustees have taken to recover the debt. A failure by scheme Trustees to pursue loan arrears may jeopardise the approval of the scheme.
Tax on loans
A company is not required to deduct tax from interest being paid to the SSAS.
Company share investment
Shares in the employing company or an associated company count towards the 25%/50% self-investment limit i.e. when calculating the amount of scheme funds that can be used to purchase company shares any existing loanbacks to the company must be taken into account.
The Trustees should consider the possible danger of tying up a proportion of the scheme’s assets in investments that could be virtually worthless if the company failed. Not only would the scheme members have lost their income, but also part of their pension rights as well.
Shares cannot be purchased from or sold to scheme members or any persons connected with them. If this is not acceptable, another alternative is for the scheme to make a loan to the company (within the overall self-investment limits) to enable the company to buy the shares.
The Trustees cannot hold shares in any unlisted company if this entitles them to more than 30% of any dividends declared by that company in respect of the shares in the class held. Therefore the Trustees could be entitled to up to 30% of any dividends declared, but this could be paid in respect of more than 1 type of share. Listings on either the Unlisted Securities Market (UIM) or its successor, the Alternative Investment Market (AIM) is not the same as being listed on the official list of the Stock Exchange.
Reporting requirements for both loans and share purchase
Loans - a properly executed Loan Agreement must be drawn up between the Trustees of the SSAS and the company. HMRC must be sent a copy of this along with a HMRC form PS7013. The Trustees have 90 days from the date that the loan was granted to send the information to HMRC.
Shares - full details of share transactions must be submitted to HMRC using the PS7014 form within 90 days of the transactions taking place.
After A-Day
After A-Day (6 April 2006) as soon as a scheme has been set up it will be possible for a loan of up to 50% of the market value of the scheme to be used. The loan should not be granted for more than 5 years, but under certain circumstances the loan can be extended.
Up to 5% of the fund value can be held in shares of the employer or an associated company.
*An associated company in one which directly or indirectly controls the other or where each is controlled by the same party.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.
Updated 6 July 2005
For professional advisers only
