SSAS – Loan Security.

 

Since 6 April 2006, a new loan to a sponsoring employer must meet five key tests to qualify as an ‘authorised employer loan’. These are set out in Section 179 of Finance Act 2004 and are:

Term of loan no more than 5 years
Maximum amount of loan (when aggregated with any existing loans to sponsoring employers) no more than 50% of the net market value of scheme assets
Repayment terms equal payments of capital and interest in each loan year
Interest rate must be commercial and no less than the CTSA rate for ‘Interest charged on underpaid quarterly instalment payments’. See  
Security secured for the term of the loan by a first charge over an asset at least equal in value to the loan plus all interest due for the term

Failure to satisfy any of the first four tests could give rise to an ‘unauthorised payment’ and associated tax charges on both the sponsoring employer and the scheme.

The security requirement can be the most difficult to achieve and the finer points are not always fully appreciated. For example:

  • If the asset(s) charged include ‘taxable property’ (i.e. residential property and/or tangible moveable property such as plant and machinery, vehicles, works of art, antiques etc.), there is a danger that if the borrower defaults, the scheme could then have an interest in those assets, which would be an unauthorised payment and could give rise to tax charges on both the scheme members (in their personal capacity) and the scheme.

          The total of these charges could be at least 55% of the amount of the unauthorised payment. It is imperative therefore, that the solicitor drafting the legal charge ensures that in any circumstances, the scheme only ever has an interest in the                    proceeds of sale of such assets and not the asset itself. In addition, the borrower should pay for all the expenses relating to the loan and legal charge. 

  • If the value of the asset(s) falls below the amount of the outstanding loan and interest due at any time during the term, it will only be a problem if the reduction in the value of the asset was due to any step taken by the scheme, the sponsoring employer or a person connected with the sponsoring employer.

          If that does happen, the unsecured part of the loan would be an unauthorised  payment and could give rise to tax charges on both the sponsoring employer and the scheme.

It should also be noted that where the sponsoring employer is to use an authorised employer loan to acquire taxable property, it would only escape the taxable property tax charges provided the interest the sponsoring employer acquires in the taxable property is for the purposes of its trade or its administration or management, and after the acquisition, the taxable property is not occupied or used by a scheme member or a person connected with a scheme member. 

Finally, before agreeing to an authorised employer loan, scheme trustees should ensure that the proposed loan is in the interests of the scheme and its members.