7 Lending to your own business
Most businesses need investment to help them grow, or to develop new products and services, however securing finance remains an obstacle.
Steve Woodham, Pensions Manager
Companies invariably look to external sources which can include private individuals, venture capitalists, business angels and banks. Many directors are finding that lending criteria has become tougher as aversion to risk continues to dominate lending decisions.
Few are aware of a source of funding considerably closer to home; namely a director’s own pension assets.
Many business owners are using their pension funds as an alternative to help secure loans to their business in light of the difficulties. UK pension funds are permitted to lend money to its sponsoring company, the type of pension vehicle that can be used to lend money to a company are Investment Regulated Pension Schemes which are commonly known as Small Self-Administered Scheme (SSAS).
The ability of the SSAS to lend to a sponsoring employer at commercial rates has provided a lifeline to
business owners whose bank will not entertain further lending in the current climate.
A SSAS is a Registered Pension Scheme with HMRC and is able to provide a unique alternative for companies seeking funding. This pension vehicle can also be used to receive transfers from the director’s existing pension assets which may be held in a pension that is not permitted to make loans, once the pension has been transferred to the SSAS it can subsequently be used to inject cash into the business.
The SSAS will also enjoy considerable tax benefits including corporate tax relief on contributions paid by the company, income tax relief on contributions paid by the member and investment growth free from income tax and Capital Gains Tax.
SSAS rules allow up to 50% of the net assets of the pension fund to be lent to the member’s business which must be secured and the SSAS Trustees would charge the business a commercial rate of interest. This can be attractive as rather than paying interest to the bank the interest is paid into the members’ pension fund and will grow tax free.
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