Let’s talk about SSAS, baby; let’s talk about security

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Small Self-Administered Schemes, or SSASs, are becoming an increasingly popular method for business owners to invest in their pensions. SSAS is a flexible and tax efficient way for directors of a business to invest in shares and property, and to make loans to third parties and even to the sponsoring employer company.

The flexibility and scope of the SSAS loan rules means it’s increasingly popular for SSAS Trustees to use them to invest in their own businesses and the unlisted businesses of others, particularly in relation to property development and crowd-funding. This advantage is highly attractive to entrepreneurs, so they may not only invest in their pension but also support their own business in a tax efficient manner with loans from their SSAS.

Here, we will focus on the two types of loans made by the SSAS and the security required:

  • Loans to unconnected companies; and
  • Loans to the sponsoring employer

Loans to unconnected companies

For loans to unconnected companies, there are no requirements for the SSAS to obtain security for the loan. Now, just because you can do something it doesn’t mean you should and whenever we’re advising on SSAS loans on unconnected companies our first question is always “what security are you getting?” If the answer is “none” or if the security doesn’t look like it offers good and sufficient security, then we will advise SSAS trustees not to proceed. This is prudent advice from both a legal and investment standpoint: there are numerous examples of investment schemes going insolvent and leaving SSASs trustees out of pocket, sometimes to the tune of hundreds of thousands of pounds with no security against which to recover the loan.

Loans to sponsoring employers

The rules for making loans to sponsoring employers require that the SSAS takes a first charge. This charge must be over an asset of equivalent value to the loan and interest. It’s worth noting that the asset does not need to be owned by the borrower. Our advice to SSAS Trustees is that the security should be over real property, being either commercial or residential property in the UK. Although there are no rules that prohibit a charge being taken over other assets – for example in the form of a fixed charge over plant or machinery – the nature of those assets is likely to mean that legal costs of creating the security will be higher and any asset that’s likely to depreciate will give rise to tax problems in the event of default.

This requirement for security is usually the biggest hurdle for SSAS Trustees wishing to give a loan to their sponsoring employer to overcome, so considering what security will be provided is a key early consideration.

Third party security?

There’s no reason why security cannot be provided by someone other than the borrower but you should be aware that where that person is not connected to the SSAS, the third party security provider should take independent legal advice in respect of their obligations and their risk.

If done right, SSAS investments can be a powerful tool for investing in unlisted unconnected companies and in sponsoring employers. Before going too far down the route of investment in either, you should pause to consider whether you have sufficient security to make the project work. The first port of call should be speaking with your Professional Trustee, as they are the experts in ensuring your proposed project fits in line with HMRC rules. We work closely with a number of Professional Trustee firms, including Sestini and Co Pension Trustees, who actively ensure the Member Trustees of their schemes have considered all security options, from both a HMRC compliance viewpoint, but also in respect of future planning.