Small self-administered schemes (SSASs) have attracted renewed interest in recent years, principally because they can lend to the employer that sets them up. But some professional trustees are failing to acknowledge the significance of the asset offered as security.
Before 2006 many of the loans made by the trustees of a SSAS were on an unsecured basis, and subsequent failure of the borrowing company resulted in the loss of tax-relieved funds from the scheme and the loss of pension benefits for the members and beneficiaries.
HM Revenue & Customs’ (HMRC) solution was to require all post-2006 loans to be secured with a first charge over an asset at least equal to the value of the loan and outstanding interest.
This should have solved the problem, except trustees are underestimating the significance of the asset used as security.
Suppose the trustees accept shares in the founder employer as security. An independent valuation of the shares is conducted at the outset and HMRC’s requirements are met. But where do the trustees stand if the employer company fails, causing the loan to default?
On default, the SSAS would immediately obtain an interest in the secured asset: the company shares. However, HMRC rules also dictate that only 5% of a SSAS’s assets can be used to hold shares in the founder company.
If the residual value of the shares exceeds this amount, a tax penalty will apply. This penalty would probably fall on the company initially, which in its failed state could not pay. Therefore the penalty would bounce back to the SSAS administrator.
It might also be assumed that, as the company has failed, the value of the shares held as security will reduce and become insufficient to cover the outstanding debt. In this case another penalty applies, again landing with the SSAS administrator.
Martin Tilley is director of technical services at Dentons.