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Family affair

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Rowanmoor Pensions director of consultancy Neil Merryweather uses the example of a family-run business to show the advantages of a SSAS

A family business manufacturing specialist electronic components has been operating a small self-administered scheme with Rowanmoor Pensions for over 25 years.

The SSAS was originally established with mother and father as sole members and trustees to build a retirement fund while retaining the valuable ability to access their funds for legitimate business purposes. Indeed, at various times, the funds within the SSAS have been used to acquire and hold both freehold and leasehold commercial property and make loans back to the company to help fund capital projects.

Father reached age 75 some while before A-Dayand the trustees bought him an annuity, which he continues to receive today.

After A-Day, mother too reached 75. Under the standard terms available from a Rowanmoor Pensions SSAS at the time, the trustees were able to offer her annuity purchase, scheme pension or alternatively secured pension. Mother declined the annuity option and the aggregate (up to 82 per cent) tax charge on any death benefits paid as a lump sum under Asp, was equally unattractive.

Accordingly, it was agreed that the trustees would grant mother a scheme pension on her 75th birthday at a level that was actuarially calculated. This scheme pension incorporated an allowance for widower’s pension and a guaranteed minimum 10-year payment period. Crucially, for reasons that become apparent later, the fund supporting this scheme pension remained an asset of the SSAS under the trustees’ control.

SSAS funds have been used to acquire and hold both freehold and leasehold commercial property and make loans back to the company to help fund capital projects

Today, the scheme membership comprises mother and her son Martin, who now runs the business. Both are trustees of the scheme. While father is no longer formally associated with the scheme, he continues to take a keen interest in both the scheme affairs and in the business he founded.

Martin is building up a pension fund of his own in the SSAS and while, during his 10 years as MD, the use of the fund assets to acquire commercial premises has been actively considered, to date, no project has come to fruition.

As part of the business’s expansion into a different area of manufacturing, a significant piece of plant will be required - a specialist lathe at a cost of around £100,000. While the company could afford to fund this purchase out of cashflow or with some direct bank borrowing, Rowanmoor Pensions has been working with Martin to consider how the pension scheme might be able to assist with this purchase.

Before A-Day, it was perfectly acceptable for trustees to use funds directly to acquire plant and machinery and lease it back to the company.

However, to do so post-A-Day results in the trustees acquiring tangible, moveable property, which is subject to a tax charge. Instead, we have resorted to the age-old and time-honoured method of making a loanback from the scheme to the company.

The loan capital cannot exceed more than 50 per cent of the scheme’s net asset value and must be secured as a first charge on suitable property, with a value sufficient to cover not only the initial capital but also the expected interest. The interest rate charged must be
SSAS funds have been used to acquire and hold both freehold and leasehold commercial property and make loans back to the company to help fund capital projectsdemonstrably commercial, with loan and capital repay-able in equal instalments over the loan term, which cannot exceed five years.

The terms of the loan, therefore, are certainly no worse than those available from their own bankers, who, not surprisingly, expect the company to jump through hoops before making funds available. In this instance, because the company is paying a significant cash dep-osit towards the lathe purchase, the piece of plant itself is being used as security for the loan.

If the scheme’s total value comprised only Martin’s share of the fund, the amount required would be marginally in excess of the 50 per cent of net asset value maximum loan.

However, since mother’s share of the fund has been retained by the trustees to pay her scheme pension, it also counts towards the total net asset value of the scheme. In aggregate, the total scheme value exceeds double the loanback capital required.

Mother’s share of the fund will remain untouched, professionally managed by a professional private client portfolio manager while Martin is able to use the bulk of his share of the scheme assets to fund a project which he and the board consider to be a major building block for the future prosperity of the business. Furthermore, because the company is buying the lathe, they will have full access to all capital allowances available.

In the run-up to A-Day in 2006, and indeed since, many commentators suggested that SSAS was effectively dead. This case study demonstrates that this is not the case. SSAS continue to offer owners of trading businesses, who wish to pool pension fund resources and retain access to them for legitimate business purposes, considerable advantages.

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