Could your directors’ pension funds help support your company’s growth?

1. Given the current uncertain climate, businesses may find it difficult to access the funding they need to support their future growth.
2. Many business owners are unaware of the potential to unlock their existing pension funds to invest in their business, or to release capital to the business.
3. If you and the other directors or senior managers of your business have pension savings, have you reviewed these to ensure they are offering you and your business optimal flexibility and control?

We examine 2 scenarios here which demonstrate how a type of pension fund called a Small Self-Administered Scheme (SSAS) can become a powerful facilitator for the owner-managed business.  Please note that each scenario requires appropriate professional advice.

Scenario 1: Your Company accesses funding by borrowing from the new pension fund

1. A new SSAS is established and the Directors transfer in their existing pension savings.
2. The SSAS can then loan up to 50% of its net asset value to the company (subject to satisfying five key tests set by HMRC).
3. The capital can be used by the company for several purposes, such as purchasing new machinery or stock. This type of planning provides the company with the funding it needs, normally secured at an attractive rate of interest.
4. The loan interest is paid to the SSAS pension fund, rather than a third-party lender, and builds up in a tax-favoured environment.
5. The SSAS has a secured investment with a fixed yield.

Scenario 2: Your Company sells its premises to the pension fund, thus releasing capital into your business

1. A SSAS is established and the Directors transfer in their existing pensions.
2. Where business property is currently owned by the company, the SSAS can purchase this property and can borrow up to 50% of its net asset value to do so. 
3. This form of planning releases capital tied up in property back to the business.
4. Rental income is paid by the company to the Directors’ pension scheme rather than to a third party and can be treated as a business expense for its tax purposes.
5. As the property is now owned by the SSAS, any future increases the property value is free from Capital Gains Tax and the rent paid to the SSAS is free from Income Tax.

Summary

• Both scenarios illustrate how powerful and flexible a SSAS can be for an owner managed business.
  • It is also possible for the company to pay pension contributions to the SSAS for the benefit of its Directors.  Such contributions normally qualify for corporation tax relief and increase the value of the SSAS fund available to both support the business and provide for the Directors’ futures.

The above is provided for information and illustrative purposes only. In both scenarios, the transactions described are subject to HMRC rules. This article does not constitute financial advice or the recommendation of a course of action. Content is based on Kerr Henderson (Financial Services) Limited’s understanding of tax law and practice as of July 2020.