Small and medium-sized non-financial businesses continued to borrow from banks. In September, they drew down an extra £1.6 billion in loans (on net) and on average, net lending was £11.3 billion between May and July. These strong flows meant that the amount borrowed compared to last year had risen sharply since the start of the Covid-19 pandemic, growing to 22.8% in September, the strongest on record.
In addition to this, the big five high-street banks — Barclays, HSBC, Lloyds, NatWest and Santander — have accounted for about 90 per cent of Bounce Back Loans so far. However, they are not taking on new customers. They complain about being inundated by demand from struggling small businesses for loans of up to £50,000, which are interest free for a year and are fully guaranteed by government.
All-Party Parliamentary Group on Fair Business Banking research has suggested that up to 250,000 small businesses “are effectively locked out of the market”, given they do not bank with accredited lenders [smallbusiness.co.uk].
If you have clients in this scenario, how would you advise your client to move forward? Instead of going to a commercial lender for further lines of credit or trying to arrange new or additional bank borrowing, there is an alternative.
For over 40 years people have utilised the flexible investment options available within a SIPP and SSAS to benefit their own Ltd company.
The sale of property to pension is a common business planning topic, linked to a business needing liquidity. A business is often sitting on an asset such as property, which could be sold to their own pension therefore moving cash from the pension into the company. As we all know, pension schemes can only purchase commercial property, but this does vary from offices to industrial units. Not only does the sale of a commercial property to your client’s pension solve their initial liquidity issues, but it also drives tax efficiencies along the way.
When commercial property is held within a pension it is exempt from Capital Gains Tax, it will fall outside of the client's estate for Inheritance Tax and (if their company continues to operate from the property) the regular rental payments from the business are an allowable expense and will reduce their Corporation Tax liability.
If you like the idea but know your client's pension is not sufficient enough to purchase the property outright, there is the option of the pension borrowing up to 50% of the net assets from a commercial lender to assist with any purchase. Alternatively, their pension could part purchase some of the property with a view to purchasing the remaining share once it builds up sufficient funds.
Another route to explore is via a SSAS loanback. The benefit of using a SSAS to assist with finance is that the client is in control of setting the interest rate. This flexibility is not possible from a commercial lender and allows the client to tailor the loanback to suit the company’s financial circumstances. Set it low to ensure you do not over burden the company with repayments - or - set it at the highest deemed commercially acceptable rate, which could give you an investment offering 7% or 8% return for 5 years.
The interest payments on a SSAS loanback are classed as a business expense in the same way as if the interest payments were paid to a bank, meaning that it can be offset against Corporation Tax. Increasing relief if interest payments are high, will in turn benefit SSAS funds which are within an IHT-free wrapper.
In order to satisfy HMRC requirements for a SSAS loanback, the scheme will need to take a first charge over a suitable asset. Other requirements also need to be met which are:
Looking at the current strong demand for liquidity in the SME market, the question that arises is whether clients can be in control of the uncontrollable (rates, source of funding). Taking this uncertainty out of the equation will potentially be a significant benefit to your clients.
Both options are great examples of how a client can utilise their pension fund to assist their Ltd company and also drive tax efficiencies. They also require in depth consideration for both the client and adviser which is where the ongoing support from your pension specialist is imperative.
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