Sense Check: Investing in Property Development with your SSAS

  • Posted

From time to time we’re asked by Small Self-Administered Schemes (SSAS) members to look at investments that they’re proposing to make from their SSAS. As we’re not FCA regulated, we’re unable to advise on the suitability of investments but what we can advise on are the legal and commercial risks of proposed investments where they relate to property development.

SSASs are an attractive vehicle for pension saving as they enable the members to use a certain amount of the SSAS funds to invest in certain products or schemes with relative freedom and limited requirements to obtain security. This freedom has led to a growing market for property developers to seek ‘investment’ from SSAS members for their property developments. The attraction for property developers is that there is a pool of available money, no requirement for the ‘investors’ to seek security and, given low savings rates and volatile futures and currency markets, investing in property development that offers a high rate of return can appear very attractive to SSAS members.

However, when we review these property development investment schemes from our legal and commercial viewpoint, we often discover that there is a high risk of loss to the SSAS Scheme. That being the case, we set out below some points that arise when we review these ‘investments’:

  1. The nature of SSAS: Always keep in mind what a SSAS is for. It’s a tax wrapper for tax-efficient pensions saving. It is not a tax-efficient investment wrapper. It is not free money. It is not your personal bank.
  2. The nature of ‘investment’: If you’re lending money to a property developer, you’re not investing, you’re lending. You should approach any opportunity through the lens of a lender, not an investor. Whilst the lending may be dressed up as an ‘investment opportunity’, all you’re actually providing is a loan.
  3. The type of security: You should always obtain sufficient security for any lending and, for a property development, this would be a charge over a property; ideally a first charge. Again, as you’re the lender, you need to consider what an institutional lender would require. An institutional lender would not, for example, lend purely on the basis of a personal guarantee from a director, so why would you lend on that basis?
  4. What is being secured? You must carefully read the security documents to understand exactly what is being secured. We have seen schemes where the security offered didn’t even cover the initial lending if the development did not deliver a certain level of profit.
  5. What security is being taken by other lenders? It’s often the case that a property developer will obtain funding from an institutional lender in addition to borrowing from SSAS Schemes. So you need to be aware of where your right to payment sits in relation to that lender, and how your security ranks in the event that there is an institutional lender.
  6. Why does the Property Developer need SASSs to lend? It would be usual for a property developer to be able to deliver a development from a mixture of their own funds and property/development finance. So why does the developer need SSAS funding? It’s usually the case that the developer needs the SSAS lending because a) the SSASs will likely lend without taking fixed security over property; and b) because the developer doesn’t have sufficient funds to obtain institutional lending due to the Loan To Value requirements, or to mean the institutional lender’s rates would be higher than would be affordable at the Loan To Value the developer is able to offer. Essentially, borrowing from SSASs enables a developer to reduce the loan to value figures.
  7. When do you get paid? Do you fully understand when you are going to be repaid, how much you’re going to be repaid and whether the offer you’re being made is subject to caveats contained in the documents you’re entering into? Is there a final payment date on which you must be returned your money?
  8. Do you fully understand the documents you’re agreeing to? Often the documents for SSAS lending to property developers are complex (and not always correct). Do the documents say what you think they say?

Property development ‘investment’ can appear very attractive. Often there are ‘guaranteed’ rates of return and they’re sold on the back of an ever-rising residential property market. But before entering into any legal agreements and lending any money, consider carefully whether the proposed agreement reflects the basis on which you agreed to lend. Are you just providing a high-risk loan with little or no security?

‘Investment’ schemes marketed to SSAS members can be high risk. Whenever you’re entering into a loan to a third party where you’re asked to sign legal documents prepared by the borrower, you should take the advice of a solicitor. If you’re lending tens of thousands of pounds of your SSAS to a property developer, spending a few hundred pounds to have a solicitor highlight the risks and advise you on the legal effect of the documents is worth it.