How the next big idea in development finance started on a train…
When it comes to property funding, there is one method that usually gets overlooked—investing through an SSAS pension scheme. In a bid to change this, Finanze has launched an exclusive product using this vehicle, in partnership with Elysium Bridging.
By Andreea Dulgheru, Bridging & Commercial Magazine
Original Article in The Development Issue, Issue 21 May/June 2022
When sourcing project finance, developers and housebuilders generally opt for a traditional senior debt and/or mezzanine loan. However, there is one method that tends to fall off the radar—investing through a small self-administered scheme (SSAS). For those who may not know, this is a type of employment pension structure that a limited company employer can establish for up to 11 members over the age of 18, in order to gain more control over how their pensions are invested; they generally comprise directors and other senior executive staff, but can also include family. Each SSAS is authorised with HMRC, granting it the same favourable tax treatment as any other registered UK pension scheme.
In addition to using the funds to further invest in the members’ company—for instance, by purchasing its trading premises and leasing them back to the firm—the scheme can borrow money up to 50% of its net asset value (calculated as the cash within the SSAS, all investments including the value of any properties owned or third party loans, minus the value of any loanbacks to the sponsoring employer and existing scheme borrowing – divided by 2) to provide additional liquidity for investment purposes.
While an SSAS can be a valuable investment tool, it does have its Achilles’ heel: the fact that it cannot be used to invest in residential properties. From his many visits to trade shows and talks with SSAS pension trustees, Alastair Hoyne, Managing Director at specialist finance brokerage Finanze, tells me that this barrier is a source of frustration and exasperation among members, particularly residential property developers. However, an impromptu conversation between him and a SSAS pension administrator during a train journey last autumn would soon solve this issue.
As the two discussed the thought-provoking debates held during an SSAS Experience Network event they’d just attended, a tantalising question came to the fore: At what point does a ‘residential property’ actually become ‘residential’? Curious to find out, Alastair spoke to a leading scheme administrator, who happened to have an ex-HMRC tax inspector within the company. Together, they determined that the residential point is not when a kitchen or bathroom is completed, but in fact when building certificates are issued.
“What this means is that you can buy land and/or convert a commercial premises within your SSAS, fund the cost of works, take the project right to the point of building certificates being issued, then stop—and it’s all within your rights to do so,” Alastair claims. “Of course, the beauty of this is that having converted the property to where it is almost residential, the value has increased substantially. The extra money you’ve made on the sale will go back to your SSAS. Given the scheme’s terms, you’re not paying capital gains or any associated tax, either.” With this strategy, once the property is near completion and awaiting certification, the SSAS can sell it either to a member once every 18 months (anything shorter would be considered trading, which is forbidden) or to an external entity as often as you want.
However, there is one obstacle that might stop SSAS trusts pursuing this investment route: lack of finance. Alastair explains that each member can only contribute £40,000 a year to the scheme, making it a fairly drawn-out task to build the pot to a level where it can be used for property funding. And while they can technically borrow bridging, commercial or development finance for traditional SSAS-permitted investments, there are very few providers in the UK market that offer something specifically designed for this, Alastair states.
This is why Alastair decided to take matters into his own hands, partnering with Elysium Bridging—with whom Finanze has strong ties through previous collaborations, including a ‘hunting licence’ loan launched in April—to create a bespoke development finance offering. Exclusively available through the brokerage, it can be used for ground-up developments and commercial-to-residential conversions undertaken by SSAS groups that may not have enough funds to invest in property on their own, or that need an infusion of cash for more expensive projects.
On paper, the SSAS development funding product offers loans between £100,000 and £10m at a maximum 65% LTGDV on terms up to 18 months, which can cover as high as 70% of the purchase price and 100% of the work costs as long as it doesn’t exceed the individual SSAS scheme’s borrowing capacity.
Depending on the client’s requirements, it can be used in multiple ways: to obtain the necessary funds to acquire land or a commercial building for conversion, to cover the development/refurbishment costs of the property, or to secure development exit finance if the final scheme (prior to the building certificate being issued) is being sold to a member of the SSAS. It could also be used to obtain finance for a combination of all three.
Once the development reaches the building certification stage, the SSAS has two options: to sell the property to a third party, in which case the loan gets repaid and any additional capital is added to the pension scheme, or to sell it to a member. Should the scheme opt for the latter, Elysium Bridging will transfer the ownership of the loan from the SSAS to the individual/legal entity, and will offer the member the extra amount needed to buy out the property (which is now likely to have an increased value) from the trust. This means that the individual member will only have to pay fees (such as the 2% arrangement charge, £500 admin, valuation, legal costs and others) on the additional sum, as opposed to taking out a separate, bigger loan.
“Using their SSAS pension, developers don’t pay stamp duty on the purchase or capital gains on the sale. So by creating the uplift in value within the SSAS, they can make a significant saving and more so when they sell out the almost finished project. They can quickly build up their pension pot, further protecting these funds from tax and providing for an efficient inheritance planning opportunity,” Alastair details.
Following a five-month testing process, during which it was refined and promoted across the country, the SSAS development funding product officially launched in June. Now, Finanze and Elysium Bridging are focusing on the next steps: completing £50m worth of loans by December this year, and £200m within the next three. “With this type of offering, particularly for development, I wouldn’t be surprised if it didn’t become our biggest product, despite it being for a more limited audience, as it’s creating a need that people didn’t realise they had,” Alastair states.
He also believes the product is opening property developers’ eyes to the benefits that SSAS investment offers them. Paul Gammond, director at Elysium Bridging, concurs: “It will revolutionise SSAS pensions and create a real opportunity for professional property investors and developers to quickly build up a large income within their pension, free of tax, while funding projects that, had they been done normally, would have incurred capital gains, stamp duty and other associated taxes.”
In addition to the ambitious targets it has set out, Finanze is looking to expand its distribution pool. Currently, the offering is available to SSASs administered by Retirement Capital and Empowered Pensions, but Alastair aims to get more pension administrators on board and make the proposition available to more trusts, to ultimately grow its use as a property investment tool. “I would like this product to be available to all the schemes that exist. At the end of the day, it’s about helping people save towards retirement successfully, and I want to assist more people in doing this,” Alastair shares.
He also wants to collaborate with more lenders to exclusively offer this type of finance. “I think there would be a prime audience for them—we’re talking about sophisticated individuals who have successfully built their own companies to a level significant enough to set up a company pension, and who have now decided to enter into the property sphere.”
Alastair observes that it is “remarkable” that the idea was born simply by talking to other finance professionals about their pain points in the market. “What we’re doing at Finanze is projecting a real picture of the landscape as it is and offering new, innovative solutions. The SSAS development funding product is the perfect case in point, and a wonderful opportunity for people to make an excellent profit simply by doing things a little differently. We have always been about ideas, and this is perhaps our most exciting one yet.”