We are still finding, even with the most robust of business models or plans, that banks are either restricting the amount they are lending, or choking potential by charging interest rates which are many times over the London Interbank Offered Rate (LIBOR), which is what the banks pay for their lending. In turn we find a continuing trend of business owners exploring the options in relation to their pension assets, which historically have been languishing in either unmanaged or misunderstood pension funds.
SSAS and SIPP solution
Self-invested pension schemes, in particular SSASs and SIPPs, can be used to help provide liquidity to businesses, either through a loan to the business from the pension scheme or by purchasing shares in that particular company. In both circumstances, especially with a developing business, this provides not only much needed liquidity, but also the potential of sufficient returns for the pension scheme. Firstly, a loan to the pension scheme would be on commercial terms, but the benefit of this is that the member’s pension scheme will be achieving a sufficient return from the company. Likewise, by purchasing unquoted shares, especially if the business is looking to take advantage of opportunities in the market, an increase in value may be seen.
As you would expect, the legislation that circles this type of transaction is complicated and as such, the application of these complicated rules to an individual situation is essential.
Buying shares in an unquoted company is not for everyone as there are significant risks to capital of the pension scheme. HM Revenue & Customs has laid down strict guidelines which must be met. Therefore, each scenario will be different and will need to be considered on a case-by-case basis. There are distinct differences between the two pension vehicles; a SSAS is restricted to 5% of the scheme value when purchasing unquoted shares in a connected company, whereas a SIPP is unrestricted. It is important to note the pension scheme must not invest in any taxable or even tangible moveable property unless it is through a genuinely diversified vehicle. An example of taxable property is an asset such as residential property, and examples of tangible moveable property are assets such as company cars, plant and machinery. The consequences of owning taxable or tangible moveable property will attract an unauthorised tax charge. However, there is the exception in that if these assets are worth less than £6,000 they will not attract a tax charge; therefore, for items above this value, the tax charge will be at least 55% of the value of the asset.
Client case study
As an example, one of my clients, an accountant, required £50,000 cash for expansion of his firm. Several high street banks were approached and the loan of £50,000 was approved, with a corresponding interest rate 7% above base rate. Also, the bank required the client’s home as security. By using the client’s SIPP, and ensuring the limited company had no taxable or tangible moveable property, the client sold shares of his practice in exchange for £50,000, which he then injected into the business. The value of the shares was provided by an independent valuation.
Whilst the above is a complicated proposition, it can provide a valuable solution for businesses requiring liquidity. As ever, they must be on balance with this type of planning to ensure that not only does the business continue to flourish and take advantage of opportunities in the market, but also to ensure that the individual’s pension scheme has invested in an appropriate manner, one that will ultimately provide security in retirement.