The bank base rate has been 0.5% for nearly 2 years now, yet banks are still charging high interest rates on loans and overdrafts and many are applying pressure to repay existing borrowing and applying stricter lending terms.
A Director’s pension scheme could lend to its sponsoring company at an interest rate as low as 1% above the bank base rate. So whilst rates are low, companies can benefit from paying competitive interest rates per annum (fixed for the term of the loan) potentially making this a very inexpensive form of company borrowing. The loan can be used for any business development purpose, including the repayment of existing borrowing or company expansion. Importantly the Director’s pension scheme benefits from the interest payments.
Loans are subject to certain conditions set by HMRC, these include:
• The loan should not exceed 50% of the net market value of the scheme’s assets
• The loan must be secured by a 1st charge against an asset of suitable value
• The loan’s term should be no longer than 5 years
• Interest of at least 1% above the bank rate should be charged on the loan
• The Loan must be repaid by equal instalments on a capital and interest basis
30th June 2011