Case study: When the bank says no a SSAS could help.

A recent new case has highlighted the advantages that creative use of a Small Self Administered Scheme (SSAS) can offer.

We were recently appointed to a SSAS scheme, which was attached to a manufacturing business. The business had been through hard times and the opportunity to acquire the premises from which it traded three years ago, could not have come at a worse time. Its high street banker had been unwilling to assist, pushing the company towards securing finance with a second tier lender whose terms were well above the major bank’s normal lending rates. 

Despite being saddled with hefty monthly repayments, a restructure of the business, promotion of a lead business developer to board level and the further appointment of a financial controller has seen the business turn round into profitability. The company has been able to extend the building and now faces the need to invest heavily in equipment, which will enable it to bring in house, manufacturing of parts, which it currently buys in. 

The company’s banker have assisted with factoring but are unwilling to lend further since their only security was the property, which was already charged to the second tier lender.

The adviser proposed two solutions:

• The first, a SSAS loan back to the sponsoring company was thwarted by a lack of first charge security. The company’s premises already being charged to the second tier lender.
• The second option was the part purchase of the company’s premises, which was achieved as follows.

The property was formally valued by a RICS qualified survey at £1,000,000. The outstanding debt with the second tier lender was around £420,000. The surveyor indicated an open market rental value of the property would be £74,000pa.

The SSAS held assets only for the company shareholder in the sum of £220,000. The newly promoted director was offered membership of the scheme and brought with him, pension transfers of £80,000. The financial controller was also offered membership of the scheme and brought with her transfers of £50,000. 

The adviser handled the transfer process and arranged through a specialist lender, knowledgeable in the SIPP market, a mortgage for £175,000, being 50% of the value of the SSAS. The rates from the new lender were arranged on competitive terms, being only on a loan to value of 33% of the asset to be acquired. The SSAS has effective buying power of £525,000 which taking into account the costs of acquisition meant that it could acquire a 50% interest in the property, which it now jointly owns with the company. 

The proceeds received from the sale of its 50% share of the property are used by the company to redeem its borrowing from the second tier lender, who at that time released the charge on the property. Although that charge was replaced by a new charge from the new mortgage lender, the charge restricts recourse to the proportion of the property owned by the pension scheme. The company’s proportion remains unencumbered.  

The company enters into a lease for the proportion of the property owned by the pension scheme and pays £37,000pa into the pension scheme, which uses this tax-free rental income to service the mortgage debt. 

The company is able to use the surplus property proceeds over the original mortgage debt repayment to invest into the machinery needed to commence its manufacturing of parts, thus bringing in house, a product which is was having to buy in and provide profit to a third party. 

It is also freed from its expensive mortgage debt and the new rental repayments are now lower than its previous monthly expenditure. Further, those rental payments are now being channelled as a tax efficient trading expense into a vehicle where senior employees can benefit from rather than them being lost in interest to the second tier lender. 

The last positive to the process is that the two senior employees offered membership of the scheme are now even more fully engaged with the business and their loyalty has been recognised and rewarded by the company’s owner.