How a SSAS Pension Can Finance Your Property
‘Pensions’ can be a taboo word amongst property investors and developers. The notion of tying up money until the age of 55, in spite of the potentially significant advantages, can often be unattractive to those adept in the property world. It might be that property is a more familiar and tangible asset, where the investor is in control of how returns can be achieved, versus investing in a typical portfolio of dozens of companies, but unable to influence matters. Or perhaps the general inability to borrow against pensions, to leverage returns, which can be achieved with property. Written by John Moore of Leadenhall Wealth Management
However, what if pensions could provide a mechanism that might allow a property project to break ground? Accessing capital for property is often the primary obstacle to getting projects underway, and developers are constantly looking to secure funding.
This article explores how using pensions might provide an alternative option to traditional property financing strategies with the use of Small Self-Administered Schemes (SSASs).
What is a SSAS?
A SSAS is a trust-based, occupational pension available to limited companies, in which up to 11 people can be members. A SSAS can provide useful strategic planning opportunities for the company, directors, shareholders and upper management throughout the firm’s lifecycle, not limited to:
Property finance via ‘loanback’ – a SSAS can make a secured loan of up to 50% of its value to a limited company for a maximum of 5 years, known as a ‘loanback’. For example, three directors have £500,000 of pensions each, which they transfer into a SSAS to form a combined pension of £1.5m. A loan can therefore be made to a limited company from the SSAS for £750,000 to assist the business with its trading activities.
‘Loanback’ interest – any loan from the SSAS will need to be repaid with interest, which has the advantage of increasing the value of the directors’ own pensions, rather than paying this to a bank or third-party lender
Syndicated funding – as a SSAS can have up to 11 members, there is potential to pool funds together to finance property projects.
Leveraging via ‘borrowing’ – a SSAS can directly buy land or commercial property. It can also borrow a further 50% in addition to the SSAS value via a pension mortgage, e.g. a £1m SSAS may have purchasing power of £1.5m.
Loans to ‘unconnected parties’ – SSASs can lend up to 100% of their value to ‘unconnected parties’, such as property developers. Security is not required in this case but is absolutely advised.
Profit extraction – a SSAS provides a potentially efficient way to extract profits from a business via company pension contributions, as opposed to taking salary and dividends where a deduction of tax of up to 45% or 38.1% applies respectively.
Corporation tax planning – company pension contributions to a SSAS are a deductible expense in the calculation of corporation tax. Therefore, companies making substantial profits, particularly those that might be affected by the recently announced corporation tax increases of 19% up to 25% from April 2023, can reduce the tax they pay.
Protection from creditors – as the SSAS is a pension trust, assets within, such as commercial property or land, cannot be taken possession of if a business fails.
Tax efficiency – if property or land is bought within the SSAS, it grows free of capital gains tax (CGT) and income tax.
Passing assets down the generations – the assets of a SSAS can be passed to children and beneficiaries free from inheritance tax (IHT). Any assets within the SSAS can be provided tax free if the person dies before age 75. If they die after age 75, then benefits are paid at the beneficiaries’ highest marginal rate of tax.
Exit planning – a SSAS can provide liquidity for shareholders to exit a business via a SSAS ‘loanback’. Additionally, business asset disposal relief (BADR), previously known as entrepreneurs’ relief, is less advantageous than before, where the allowance has fallen from £10m to £1m. Therefore, keeping assets in the business might be less attractive than it used to be.
Case Study – SSAS ‘loanback’
An existing client had a defined benefit pension (final salary scheme), which increased in value from c£450,000 in 2020 to c£950,000 in 2021. The pension was transferred to a SSAS, with a view to the client’s property development business receiving a ‘loanback’ to purchase a commercial unit for c£350,000, which will be converted to residential flats and sold for approximately £1m.
A loanback of £400,000 (term of 5 years, interest of 5%, repaid annually) will be paid from the SSAS to her company, to help the business purchase the unit and complete the project. The c£52,000 of interest payable after the 5 years is repaid back to her own pension scheme, rather than a bank, had she borrowed the money there. The business is able to repay the ‘loanback’ in full before the 5 years, if required.
In addition to the loanback, the client is also providing an ‘unconnected’ loan of c£200,000 to another property developer from her SSAS, where the project aims for returns of 30%.
The remaining c£350,000 has been invested in a portfolio of global shares.
Property and pensions
Upon reading, many may feel that the 50% ‘loanback’ facility, the pooling of pension assets to syndicate and ‘borrowing’ are the SSASs’ most useful features in terms of investing in property.
However, given the advantages stated, we suggest that the majority of profitable limited companies can benefit from utilising SSASs as a ‘financial toolkit’ for the business, where pension contributions are made in successful years to reduce corporation tax, with the knowledge that the business can access 50% of these same contributions via a ‘loanback’.
Considering that finance can be raised from pensions, or that capital within can be used to invest directly in property, may just persuade investors and developers to reconsider the use of such vehicles.
Note that each director’s financial position and objectives are different. What might be appropriate for one business owner may not be appropriate for another. There are risks to this planning, and these need to be fully understood before initiating such a strategy. Therefore, before pensions are utilised to invest in property projects, it is important to seek appropriate, regulated advice.