As part of the Government’s response to the coronavirus they have introduced the Bounce Back Loan Scheme (BBLS) to enable smaller businesses to access finance more quickly during the coronavirus outbreak. The BBLS is designed to help small and medium-sized businesses to borrow between £2,000 and up to 25% of their turnover, up to a maximum of £50,000. The loan is guaranteed by the Government and is free of any fees or interest for the first 12 months, after which the interest rate will be 2.5% a year. Under the BBLS the borrower is required to self-declare they meet the eligibility criteria for the scheme, and lenders do not have to assess affordability or viability. Whilst the scheme will be welcomed by many the cap of 25% of turnover and a maximum of £50,000 may be limiting for some businesses.
If you are a business owner looking for further or an alternative source of finance to help your business get through these difficult times, and in the current economic climate are finding it difficult to arrange finance via the traditional route of your local bank, then there may be other options available to you if you have existing pension funds.
One often overlooked feature of pension planning is the ability of a pension scheme to lend money to its sponsoring employer. This feature known as a loan back, or authorised employer loan in HMRC terminology, is available through a company pensions called a Small Self-Administered Scheme (SSAS).
A SSAS is normally only suitable for business owners and their families. The scheme members are able to consolidate their existing pension savings into the SSAS which operates a pooled fund. The pooled pension fund provides the loan to the company and the interest payments are paid into the pension fund. The basic features of a SSAS loan back are as follows:
- Maximum loan limit of 50% of the net value of the SSAS pooled fund
- Interest is paid to the SASS at a rate of least 1% above current base rate
- A 5-year maximum term but this can be rolled over for a further 5 years
- Capital and interest repayments in equal instalments at least annually
- Security must be in place
A SSAS loan back may not be a quick source of borrowing as it can take time to register a SSAS with HMRC. When transferring existing pensions into a SSAS it may be prudent to seek professional advice to ensure that any valuable guarantees under the existing plans are not lost. Also, the conditions of the loan back need to be adhered to if the loan is to be treated as an authorised employer loan by HMRC. If the conditions are not met there can be adverse tax consequences, and these tax charges could even result in the scheme being deregistered as a pension.
Another option is to use your SIPP or SSAS pension fund to purchase a qualifying company asset, such as the commercial property. The pension can also borrow up to 50% of the value of the fund to finance the investment, and with a SSAS the borrowing can be used in calculating the maximum loan back to the employer.
The decision to use of your pension should be carefully considered. It should never be used to prop up an ailing business, because not only could the company fail but the pension that will provide your income in retirement, could also be lost with it. Real consideration needs to be given to whether or not the loan back or property acquisition is a good investment for the pension scheme to make. In this complicated area advice should be sought.