As a business owner you may need to raise money from time to time. If you don’t want to sell shares in the company, or dispose of business assets, borrowing is the only option.
The usual route is to borrow money from a bank, or from your personal wealth, in the form of a director’s loan. Did you know you could use your pension money to lend to your business?
If this is of interest, you will need to consider the following;
- Check what your existing pensions are worth. The maximum loan is 50% of your pension’s net assets and the money would need to be moved into a pension that can facilitate such lending.
- Have a clear objective. Most providers will insist that a loan is made for a valid business purpose (i.e. development of a new product line or purchase of machinery) and not simply to help with cashflow, so you’ll need to think carefully about what you need the money for & be confident the company can afford the repayments.
- Establish what you’ll use as security. The loan must be secured and the type of asset accepted can vary between providers.
- Determine the interest rate & payment terms. A loan agreement will need to be drafted detailing the interest rate & repayment terms. This must be a on commercial basis and the term cannot be more than 5 years.
Aspire are experts in this field and can guide you through the benefits, risks & limitations. It’s imperative that HMRC guidelines are followed in order to avoid significant tax penalties – so if you’d like to know more, get in touch.
Real person, real case
Steve, an existing client, owned 65% of the shares in his company, with the remaining shares being owned by 4 silent shareholders. He was the only shareholder actively working in the business and therefore he became frustrated that his remuneration options were severely restricted – any dividends declared would need to be paid to all 4 shareholders. He was also planning to sell his business in 4-5 years and wanted full control.
Other than a personal pension, worth around £500,000, all of Steve’s money was invested in the business. We helped him establish a special type of UK occupational pension scheme primarily designed for business owners (a SSAS – Small Self Administered Scheme). We helped him transfer his existing pensions into it and lend £250,000 back to his company. This money was used to buy back the shares from the other shareholders.
Whilst the loan term was 5 years the company performed well and it was possible to clear the debt in 3 years. The pension benefited from the interest paid on the loan repayments.
Towards the end of last year the business was sold – owning the entirety of the business meant our client was able to have free rein to negotiate the sale, and receive 100% of the sale proceeds.
This type of transaction allows you to use your pension money to support your business. The business gets money without having to resort to a bank; the pension gets the benefit of receiving a commercial rate of interest on the loan, with security in place if the business fails. There are limitations which don’t apply to normal borrowing, so you should seek expert guidance to make sure the transaction is viable and is in your best interests.
You won’t be surprised to learn there are risks associated with this type of transaction, the severest of which arise if HMRC guidelines haven’t been followed and they deem the loan an ‘unauthorised payment’. This can result in significant tax charges (as high as 70%). Therefore, you’ll need to work closely with a professional who has the necessary experience and expertise.
Not for everyone
To an extent you are putting all of your eggs in one basket – if your company fails there are likely to be severe repercussions for your pension. Advancing money from your pension to your business will also reduce liquidity in the pension, which could be a big issue if you plan to retire and access your pension benefits in the near future, so this type of transaction always needs specialist advice.
For more information, please contact Tom Shorland