RPSM07400060 - Employer Pages: Investments: Can a registered pension scheme make a loan to a sponsoring employer?

Can a registered pension scheme make a loan to a sponsoring employer?

A registered pension scheme may make a loan to the sponsoring employer or any party unconnected to the member. For loans made after 6 April 2006 there are 5 tests that are used to determine if a loan to an employer is on a commercial basis (see RPSM07103050).

1. The loan must be secured as a first charge on an asset of equal value.
2. The loan must have a commercial interest rate (at least 1% above high street bank rates).
3. The repayment period must not be longer than 5 years.
4. The amount loaned must not be more than half the value of the scheme’s funds.
5. Repayment of the loan must be in equal annual instalments.

Where any of the five tests are not met, the employer will be liable to an unauthorised payments tax charge.

However, if any loans are made to the member or a connected party they will be subject to a tax charge.

If the registered pension scheme is not an occupational pension scheme there will be no sponsoring employer. If the employer is connected to the member then any loan from the scheme will attract a tax charge on the member.

Loan rollovers

Where an employer is having genuine difficulties making repayments and there is an amount of capital or interest outstanding at the end of the loan period, the loan period can be extended and the loan repayment date to be postponed or “rolled over” once for a period up to a further 5 years starting from the standard repayment date.

Further information on rollovers of loans can be found at RPSM07103160.

Loans to employers made before 6 April 2006

Providing that there are no changes to the repayment terms made to a loan advanced prior to 6 April 2006, the loan will be subject to the rules in existence prior to 6 April 2006.

If after the 6 April 2006 there is a change in the repayment terms of a loan taken out before that date, any amount owing (including interest) will be subject to the new rules.

The rules for rollovers of loans taken out before 6 April 2006 are covered at RPSM07103200.