CPAA Insight: An underused way to beat the banks

This article first appeared in the December  2013 edition of CPAA's membership magazine, Practising Accountant. 

 

Mattioli Woods consultant, Paul Cliffe, discusses loanbacks from Small Self Administered Schemes (SSAS)
 

During the last few years we have often heard politicians saying “we’ve got to get the banks lending again”. Unfortunately, despite much debate and noise, this has not been the case and, regardless of the rhetoric coming from Westminster, the simple fact is that banks are simply not lending to enough businesses.
 

Many of the accountants I speak to say the same thing; although their clients have great business models and are achieving healthy profits, they frequently require additional liquidity in order for their business to develop. Those who do meet with their bank manager, and manage to hurdle the ever-increasing criteria required to be approved for funding, are faced with high interest rates that are better associated with credit cards or payday loan companies, rather than being business or long-term private client centric.

In some cases, the use of directors’ pension benefits to establish an SSAS is an option. This type of pension scheme can lend money to a sponsoring employer at a commercial rate.

SSAS Terms

An SSAS is able to lend half of its value to a sponsoring employer, and with the average age of a director being 58, many may have considerable pension funds which have been built up over the years. Combining these funds could create a substantial amount of money available for lending purposes.

These loans, known as a loanbacks, are useful in assisting the development of a business but are also efficient when a company is already producing healthy profits.

A lump sum contribution can be made to the pension scheme and then loaned back to the business in order to retain the cash within the company. This creates an initial corporation tax saving as well as future corporation tax savings on the loan interest repayments.

The terms of a loanback are relatively straightforward when compared with the reams of small print associated with a high-street loan, and set up costs are also not unreasonable.

Security is needed to cover the loan, which must equal the value of the loan plus the interest over the period. The maximum term of the loan is five years with repayment on a capital and interest basis. Therefore this vehicle should be seen as a short to medium-term funding solution and not an open-ended debt source.

Planning & advice

It is important for clients to know that there are alternative sources of finance available, but appropriate planning and advice is required before considering such a proposal and should not be used incorrectly to support a failing business model.

 

 

For more information on SSAS or other pensions queries please contact Paul Cliffe: p[email protected] or 07730 764 651.