For a five-year loan, the prescribed amount is calculated as one-fifth of the total capital and total interest. By the end of year one, one-fifth must be paid. By the end of year two, two-fifths must be paid, and so forth.
Therefore, it is best thought of as a kind of schedule by which certain repayment targets must be met. This means it is still possible to pay off the loan early.
Security
The loan must be secured on an asset. This can be an asset owned by the sponsoring employer or another party. For example, it could be secured on a property owned by one of the members. The value of the asset must be at least equal to the value of the loan plus the interest.
It is important to note there are potential pitfalls if taxable property is used as the security, whether it is plant and machinery owned by the company or a residential property owned by the client. The most straightforward approach here would be to use commercial premises owned by the employer.
If the loan is not secured at all, the whole of the loan (including the interest) would be an unauthorised payment.
Martin Jones is technical manager at AJ Bell
