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5 Key Tests the employer must pass to borrow from a Pension Scheme
There are five key tests that a loan from a Pension Scheme must satisfy to qualify as an authorised employer loan. If a loan fails to meet one or more of these tests an unauthorised payment charge will apply.
The five key tests are
- security
- interest rates
- term of loan
- maximum amount of loan and
- repayment terms.
Security [S179, Sch 30]
If a registered pension scheme makes a loan to an employer the amount of the loan must be secured throughout the full term as a first charge on any asset either owned by the sponsoring employer, or some other person, which is of at least equal value to the face value of the loan including interest.
If the asset used as security is taxable property then there may be additional tax charges under the taxable property provisions if the registered pension scheme is an investment regulated pension scheme.
Taxable property consists of residential property and most tangible moveable assets. Residential property can be in the UK or elsewhere and is a building or structure, including associated land, that is used or suitable for use as a dwelling. Tangible moveable property are things that you can touch and move. It includes assets such as art, antiques, jewellery, fine wine, classic cars and yachts.
Interest Rates [S179, Sch 30]
All loans made by registered pension schemes to employers must charge interest at least equivalent to the rate specified in The Registered Pension Schemes (Prescribed Interest Rates for Authorised Employer Loans) Regulations 2005 (SI 2005/3449). This is to ensure that a commercial rate of interest is applied to the loan.
The minimum interest rate a scheme may charge is calculated by reference to 1% above the average of the base lending rates of the following 6 leading high street banks:
- The Bank of Scotland
- Barclays Bank plc
- HSBC plc
- Lloyds TSB plc
- National Westminster plc and
- The Royal Bank of Scotland plc.
The average rate calculated should be rounded up as necessary to the nearest multiple of ¼%.
Term of Loan [S179, Sch 30]
The repayment period of the loan must not be longer than 5 years from the date the loan was advanced. The total amount owing (including interest) must be repaid by the loan repayment date.
Maximum Amount of Loan [S179, Sch 30]
Section 179 (1)(a) of Finance Act 2004 restricts the amount of a loan which can be made to a sponsoring employer to 50% of the aggregate of the amount of the cash sums held and the net market value of the assets of the registered pension scheme valued immediately before the loan is made. These restrictions are necessary because although such loans provide a useful source of business funding, there may be liquidity problems for the scheme if there is a sudden requirement to provide scheme benefits. It may also not be prudent to lend scheme funds to one company.
Repayment Terms [S179, Sch 30]
All loans to employers must be repaid in equal instalments of capital and interest for each complete year of the loan, beginning on the date that the loan is made and ending on the last day of the following 12 month period – known as a loan year.
Often Land and Commercial Property are used as the security for Pension Scheme loans but the problem is having first charge over the asset!
steve@bicknells.net
What is the 10% Crowdfunding Rule?
Crowdfunding is a way in which people and businesses (including start-ups) can try to raise money from the public, to support a business, project, campaign or individual.
https://www.youtube.com/watch?v=h-yff2Ord80
The term ‘crowdfunding’ applies to several internet-based business models, only some of which we regulate.
The Financial Conduct Authority don’t regulate:
- Donation-based crowdfunding: people give money to enterprises or organisations whose activities they want to support.
- Pre-payment or rewards-based crowdfunding: people give money in return for a reward, service or product (such as concert tickets, an innovative product, or a computer game).
The FCA do regulate:
- Loan-based crowdfunding: also known as ‘peer-to-peer lending’, this is where consumers lend money in return for interest payments and a repayment of capital over time.
- Investment-based crowdfunding: consumers invest directly or indirectly in new or established businesses by buying investments such as shares or debentures.
Further details on their website
The Financial Conduct Authority is proposing that starting from this year inexperienced investors in equity schemes will have to certify that they will not invest more than 10% of their portfolio in unlisted businesses.
Firms that run the website platforms say the rules are too tight and will put off potential investors.
Barry James, founder of The Crowdfunding Centre, says: “Make no mistake, the infamous 10% rule – however it’s dressed up – does just that: it takes the crowd out of equity crowdfunding.”
Despite the crackdown, investors who lend to small companies will not be covered by the Financial Services Compensation Scheme which protects investors if they are mis-sold an investment or if the company they invest in goes into liquidation.
The FCA believe there is high risk that consumers could suffer losses from peer-to-peer lending.
Is the risk too high? would you invest?
steve@bicknells.net
Why you should maximise borrowings on your Buy to Let
If you own a Buy to Let property as an individual rather than in a limited company it is worth maximising your borrowings against the Buy to Let because the interest will be a tax deductible expense.
It doesn’t matter how you borrow:
- Mortgage on the Buy to Let
- Personal Loan
- Overdraft
- Re-mortgage of your main residence to invest in your Buy to Let
The rules allowing this are covered in http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm
So, for example, if you had a Buy to Let property with low borrowings against it and a mortgage on your main private residence, you could increase your borrowings on the Buy to Let and pay off your private residence mortgage.
But you need to be aware that the maximum you can borrow on the Buy to Let is the market value when it was first let.
Here is an example from Tax Cafe – How to save property tax
Property investors are often unsure whether their interest is deductible. This depends on how the money is used. Use it to buy investment property and the interest is tax deductible. Use it for personal reasons and the interest is not deductible.
There is an exception to this rule: you can generally remortgage an investment property up to its original purchase price and the interest will be tax deductible, whatever you use the money for. For example, let’s say you bought a buy-to-let for £100,000 and the current mortgage is £60,000. You can borrow up to another £40,000 (if the bank will let you!) and all the interest will be tax deductible, no matter how you use it.
You will need to keep detailed records of the borrowing and interest for your tax returns.
Alternatively you might focus on paying off your main residence mortgage first to leave the borrowings high on the Buy to Let.
steve@bicknells.net
Crowdfunding – How Social Media is helping businesses to get funding
Here are some examples:
- In 1997 British rock group, Marillion, raised £38,000 from its fans to pay for its US tour. They then went on to use the same method to fund several albums
- In 2010 Hotel Chocolat offered 3 year, FSA approved ‘chocolate bonds’ to its 100,000 tasting club members. Customers were invited to invest £2,000 for a gross annual return of 6.72%, or £4,000 for a return of 7.29% which were paid in regular deliveries of chocolate. The Bonds raised an incredible £3.7m for the company.
- In 2011 Caxtonfx (foreign exchange) raised £4m from its bond issue
- In 2012 Mr & Mrs Smith (travel website) started the process of raising £4m from a 4 year bond with cash interest of 7.5%, or 9.5% if the ‘Smith loyalty money’ option is taken
- In 2012 Pebble Technology, a Palo Alto based smart watch company used Kickstarter.com to raise $10m against forward sales of its Pebble watch
According to Simon Dixon, to be successful in crowdfunding there is a simple formula £££ = R + SC + E
Where the money raised depend on the strength of the rewards your offer (R), how much social capital you have (SC) and the emotion attached to your story (E)
Its early days, but could this be the future for some businesses, using their fans and contacts to access funding. Social Media and the internet are definitely playing a part in moving this forward.
steve@bicknells.net
Business Accountant 