Month: April 2020

Purchasing property with your company pension

Your SSAS pension and what it can do for you right now

If you read last weeks blog you’ll know all about how your small, self-administered pension schemes (SSAS) has a loanback facility that you can use to access much needed cash flow. If you haven’t read it, please do.

Well, the joys of your SSAS don’t stop there. It can also be used to purchase property. However, please read on carefully, as there are many do’s and don’ts associated with SSAS schemes and property purchase. Getting it wrong could end up costing you a great deal in tax. 

Who can and can’t be involved in the purchase

If you wish to, your pension scheme can purchase property with other parties such as your company, yourself or another pension scheme. It can even purchase property with an unconnected party. 

However, HMRC do require that the pension trustees obtain independent professional advice to confirm the market values regarding the purchase price or rental, if there is any connection with the pension scheme with the vendor of the property. This must be undertaken in order to comply with HMRC’s ‘arms-length’ requirements regarding the transaction. 

Where there is no connection with the other party, HMRC does not require any independent valuation.

For cases of joint ownership

If your SSAS has purchased the property with a third party, then a Declaration of Trust (DOT) will be required, in order to legally recognise the proportion of ownership held by each party. As this involves your pension scheme, the DOT needs to include pre-emption rights. Where the pension scheme may have to liquidate its investment in order to pay death benefits, it’s usual to offer the co-owner(s) first refusal to buy its share.

Your business, yourself and another party can purchase property jointly. As long as any joint ownership is registered with the Land Registry, any property purchased can also be let back to your own business or an unconnected party. It is however important that the SSAS pension scheme only receives its proportion of the sale proceeds or rental income and it must also ensure that it pays its percentage of all ongoing expenses.  

Buying, selling and letting

If you are considering using your SSAS to purchase a vacant property, then you will be required to ensure that there are sufficient funds available to cover repairs, rates, maintenance and all legal and other costs, as there is no rental income immediately available. This is usually achieved by retaining the relevant sum, which is held back in the pension fund. 

You SHOULD NOT purchase residential property with your SSAS. As residential, and some other types of property, are subject to very significant and costly tax charges if held by a pension scheme. To avoid these onerous tax implications, you really should only consider the purchase of commercial property such as retail, office and industrial buildings. 

Flipping from commercial to residential can be done

As your pension scheme can’t hold residential property without facing extremely high tax charges, if you are looking to purchase a commercial property and flip it to residential, then you need to be aware of what point HMRC deems it to have converted to residential. 

From speaking with architects, it’s our current understanding that the certificate of habitation and the point at which a commercial unit becomes a residential one (as referred to by HMRC), is at the point when the Completion Certificate is issue by the architect. As such, it’s imperative that the property is taken out of the pension scheme PRIOR to the Completion certificate being issued by the architect.

Property types you should and shouldn’t consider

This is a brief list of The Good, The Bad and The Ugly when it comes to property types you can consider for purchase with your SSAS: 

The Good

  • Shops Industrial property Offices
  • Hotels
  • Care Homes
  • Pubs and Restaurants
  • Farmland Development Land
  • Car Parking

The Bad (property types not allowed)

  • Residential Property
  • Holiday lets
  • Timeshares & beach huts
  • Freehold including long leasehold residential (even if only ground rents)
  • Caravans and other moveable property
  • Log cabins
  • Leasehold property with less than 50 years (deemed a “wasting asset”)  

The Ugly (to be avoided despite being commercial)

  • Any un-lettable property that will be sold again in the short term
  • Specialist properties that are difficult to sell
  • Properties with environmental or contamination issues
  • Any property adjacent to your house or garden 

Please note that this is a guide only and you should properly research if the property you are thinking of purchasing complies with HMRC rules.

Where can you raise the finance for the purchase?

Your SSAS is allowed to borrow from any source available; just so long as the loan terms are commercial. Obviously if the source is a bank or building society, then the terms will automatically be commercial. Where the lender is a source that does not have a consumer credit licence, or is connected to you, then you may have to provide accompanying evidence that the terms are commercial. 

Repayment of borrowing

Although you may be able to prove rental income, you should also consider affordability. 

Which is why, at the initial stages of purchase, a Member Trustees should be tasked with considering this aspect. It is also important that you do not rely upon future pension contributions to meet borrowing requirements, as the future payment of contributions is not mandatory.

Borrowing limits

If you are using your SSAS to fund a purchase for the first time, then your first loan can be up to 50% of the net value of the pension scheme. 

For example: 

Pension Scheme value:                                 £100,000 

Maximum borrowing:                                     £50,000 

Amount available to purchase property:   £150,000

  

Get the right advice from day one

Get professional advice on the rules of property purchase, development, leasing, resale or any other aspect of property ownership from a qualified and expert financial adviser who knows this area well. The wrong advice, or no advice at all, could leave you with a whopping great tax bill and a badly damaged pension pot. 

As always, we at Bridgewater Financial Services are here to provide expert and independent advice on any questions you have regarding using your pension to acquire property, or any other financial enquiries you may have. 

Stay safe

 

A SSAS could be the answer to cash flow needs

SSAS – what it is and can you transfer to one today?

A SSAS is a small, self-administered pension schemes (SSAS) for up to 12 members. 

Right now you can transfer any existing pension into a SSAS, where the combined funds can be used to borrow money, up to 50% of the fund value (if needed) to buy back premises owned by the company, releasing funds to clear other debts or to finance projects (e.g. new business opportunities that have arisen out of the current situation as businesses adapt to new areas). With many companies using the loanback facility to get access to extra funds for pressing cash flow needs. 

This loanback facility that is incorporated into all SSAS has been responsible for a dramatic increase in SASS activity over the past few weeks.

According to The Whitehall Group, one of the leading SSAS providers, reported SSAS registrations increasing eightfold in just the first ten days of April 2020, compared to figures for January earlier this year. 

It’s the loanback facility that is so appealing

With borrowing rates for a SSAS at incredibly low levels, companies who have assets or properties in their SSAS are utilising them as security to borrow against, as they realise much needed cash flow for their companies. 

With more and more business owners realising that their own SSAS could provide a low-cost lifeline to keep their businesses afloat during the Covid-19 economic crisis. 

How your SASS could save your business

SSAS can work for your business in many different ways. It can provide loan finance back to the business of up to 50% of the total amount of the net market value of the business SSAS scheme’s assets, as well as 50% of the total amount of cash held.

That kind of cash injection, borrowed against rock-bottom interest rates, is providing the financial lifeline that many businesses so desperately need. With the number of loans reported having quadrupled in April, compared to January’s activity. 

A word of caution

This sudden increase in SSAS activity is a reversal of recent year’s trends, which saw the popularity of SSAS schemes decline, as they are not regulated under the Financial Conduct Authority rules and protections. 

As such a SSAS should be considered carefully and regard should be paid to the wider aspects of the scheme. Your SSAS shouldn’t just been viewed as a low cost route to answering any current and pressing borrowing needs. In fact, any loans made in a SSAS scheme should always be to ensure that the company doesn’t just survive, but also goes onto grow in the future. 

There is also an obligation by the trustees of the SSAS scheme that they do not risk pension money that is intended for retirement. Therefore proper consideration should always be given to determining if the loanback is a good investment for the pension scheme to make. 

Done properly it could be a cash flow lifeline

Although loanbacks are currently a very enticing selling point, any SSAS must be executed properly, or it runs the risk of its members losing out. HM Revenue & Customs have stated that any loans made to the sponsoring employer will qualify as an authorised payment if their key stipulations are adhered to, including:

  • A five year minimum term
  • Interest rates must be at least 1% above the current base rate
  • The loans must not exceed 50% of the SSAS’ net assets.

It’s important that trustees follow procedure and document the loanback correctly. Failure to ensure that the correct securities are in place could mean that the loan will not qualify as a loan. Instead it becomes viewed as an unauthorised payment and will incur tax charges. 

If you are in any doubts regarding the trustees obligations, or how to administer the loanback correctly talk to professional financial advisers like us, to ensure you don’t fall into any of the many pitfalls that can await unsuspecting trustees.

If you need the SSAS lifeline – act now 

The world seems full of endless financial delays during this Covid-19 downturn. Banks are taking longer to process loan applications, charging increased interest rates and asking for personal guarantees.

However applying to switch an existing pension to SSAS, or to set a SSAS up from scratch also takes time. HMRC have to accept and register a new SSAS before any money can be transferred or paid in. So the sooner you start the process, the sooner you can take advantage of the unique facilities of your SSAS. 

Remember – we’re always happy to help

As always, were here to help, whenever you need us. If you do have any further questions regarding anything I’ve raised in this blog, then please get in touch with us at Bridgewater Financial Services, where we will be delighted to help guide you through your individual options and strategies.