Self Investment provides you with considerably more freedom in respect of your investment opportunities not least the opportunity to;
- Purchase commercial property for your business
- Make loans to your business (providing you are a Limited Company)
Property purchase could generate significant cash flow as there would ultimately be no mortgage to pay and this would provide a buffer against hard times if profits reduce. Furthermore, pension contributions and rent paid by the Company can be offset against profits ie they are tax deductible.
Apart from the Pension fund receiving a market rent from the Company for the property the property itself should represent a solid investment, with high income and capital growth potential, all of which is tax free, including the ultimate sale of the property. As you can appreciate all these benefits are within limits prescribed by the Inland Revenue so that the amount borrowed to fund property purchase is limited to 50% of the fund value in the form of a mortgage if required.
By transferring the ownership of property to the Pension Fund it will assist in protecting it from a receiver (should it ever be necessary!), and will allow the Company to retain control of an asset which is critical to it’s continuity. In the event of insolvency, the Directors, who will all be Pension Scheme Trustees, will remain in control of their pension assets which will include the business property, and the benefits of such an arrangement are obvious.
As you can appreciate all of the above facilities come with a range of fees and charges as well as an inordinate amount of regulation so they do require careful consideration however it is always worth exploring and comparing to traditional funding options, particularly when lending by the Banks and traditional institutions is becoming increasingly difficult to procure.
Loans to your Company
The loan to your business is actually made from the Pension fund itself. Put simply, who would you rather pay interest to, yourself or the Bank? However loans do have to be established on a HMRC prescribed basis and fulfil the following criteria;
It must be for a documented bona fide commercial purpose
Must be secured against a saleable asset, (this can be a personal asset such as a house) which has been independently valued by a recognised professional such as a member of RICS or an Accountant and it must be capable of a charge being Registered against it.
- The loan must be on a capital repayment basis
- The loan term must be fixed and not exceed 5 years
- It must be set at a commercial rate of interest
- The loan amount to your Company must not exceed 50% of the net assets of the value of the pension fund
- There must be a standard loan agreement in place
The loanback system is relatively low cost and good value and as the Pension Scheme Trustees and Company Directors are one on the same, you are unlikely to foreclose on yourselves. It is therefore low risk for the Company, and as it is secured it is also low risk for your Pension Fund. However do be aware any failure to make the scheduled repayments or fulfil any obligation under the loan agreement will be a reportable event and attract the attention of HMRC so it is not something to be undertaken lightly. There is also the very real risk that should your business fail you will lose both your livelihood and your pension income in retirement so this is something that should not be entered into without very serious consideration.
SSAS – an overview
A SSAS usually evolves when the directors of a business want more control over the investment decisions relating to their pensions and in particular, use their pension plans to invest in the business. As such, each member of the SSAS is usually a trustee.
The following are features of a SSAS:
- It is an occupational pension scheme governed by company pension Scheme rules
- Members are usually employees and directors of the sponsoring employer
- The SSAS can hold a maximum of 11 members
- Each member has a notional share of the SSAS funds including assets such as property
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