Complexities involving the tax treatment of unquoted shares have prompted some SIPP providers to be cautious of including them. However, this needn't be the case says Christine Hallett
In April 2006 the rules governing pension schemes were radically altered under 'Pensions Simplification' and, as a result, instead of having a list of permitted investments for SIPPs, the choice was opened up to include, among other things, the potential to invest in unquoted shares.
The last minute reversal by the Government on residential property in late 2005 did have an indirect impact on pension schemes investing in unquoted shares, in that the complex legislation brought in to implement this u-turn went far wider than initially thought. The Finance Act 2006 brought in rules which imposed stringent tax charges on any investment made by a SIPP or SSAS in what it called 'taxable property'. As well as direct interests, the tax rules catch (and tax) indirect interests a SIPP/SSAS would effectively acquire in such assets - unless the investment met certain conditions and was sufficiently at arm's length - what HM Revenue & Customs has referred to as a 'genuinely diverse commercial vehicle' - GDCV.
In many ways the inclusion of genuine arm's length investment in residential property through vehicles such as unit trusts, Limited Partnerships and EPUTs was welcome. However, the issue with unquoted shares was that HMRC included as 'taxable property' not only residential property but what is referred to as 'tangible moveable property'. This term was designed to catch out investments such as antiques, paintings, sports cars etc, the type of pride-in-possession asset classes that have not historically sat easily with the sole purpose test under the previous tax legislation. However, these new tax rules defined 'tangible moveable property' as any asset that can be touched and moved, unless exempt by regulations. That is any asset, no matter how small or trivial or how illogical its inclusion in the taxable property definition. To ensure they did not miss anything HMRC tarred all moveable property with the same brush.
So what does this mean if I want to invest in a small company through my SIPP?
The bottom line is that if the investment is not deemed sufficiently arm's length under the tax rules (so it is not in a GDCV) the SIPP would be treated as having an interest in any asset that company owns that can be touched and moved (commensurate to the relative interest the SIPP held in the company). So if the SIPP held 30% of the share capital and the company holds £100,000 of 'taxable property' your SIPP is deemed to hold £30,000 of that property and tax charges would arise on that £30,000 if the company was not a GDCV in relation to the SIPP.
While there is some exemption from the taxable property tag for property held by the company under £6,000 in value which is purely used for the purpose of the company's administration and management, HMRC's interpretation of this exemption appears to be very narrow (and not at all clear). Basic office equipment like desks and chairs will be exempt, but anything held by the company for the purposes of their trade will not (so moveable machinery, components, fork-lift trucks, company cars etc all fall as taxable property).
In short, most trading companies that are not GDCVs will have taxable property to trigger tax charges. Not only will charges on the member and SIPP arise on acquisition in relation to these assets, but charges will arise in the future every time further assets are acquired by the company. In most circumstances where tax charges would arise, the administration and accountability of the charges due at outset and over-time would be a nightmare.
Complexity is added, in that it becomes very difficult to judge whether an unquoted share investment is a GDCV where dealing with a 'close company' (broadly a company controlled by five or less people). Here the legislation taps into the definition of control in company tax legislation, and requires all interests held by every member of every SIPP scheme, together with connected outside interests, to be aggregated together and judgement made whether this constitutes a controlling interest in the company. This is not easy to judge with certainty where there are hundreds of SIPP members, and 'control' is notoriously difficult to judge as there are so many ways control can be attributed and interests amalgamated for control purposes. The 'close' company must also be trading to be a GDCV.
In larger, non-close companies, the definition of a GDCV is potentially clearer and easier to judge, but even if you satisfy yourself the investment is a GDCV at acquisition, there is no guarantee the position will not change in the future (if the shareholding structure changes).
Given these complexities, most SIPP providers have not allowed members to invest in unquoted shares. While the concerns outlined have been a stumbling block for some members who want to invest in their own family or close company and have not generally been able to do so (without triggering tax charges) - we have still found that other types of unquoted share investments have been popular with many of our members.
However, there are still lots of investment opportunities that will not trigger tax charges. A fair proportion of our cases have been new issues raising private equity for growing companies, many potentially with plans to eventually float on AIM. Generally, the member has no existing interest in the company and is investing on an arm's length basis for a very small percentage of the issued share capital. Some of these transactions have been in structured pre-IPO deals in a company co-ordinated by an IFA, with a number of our members participating (but again in aggregate only owning a small percentage of the issued share capital).
We have also undertaken a few investments where larger proportions of shares have been purchased of smaller companies, and either the adviser has been satisfied the shareholding structure means it is a GDCV or, given the size and nature of the company's business, we have been satisfied no taxable property was held by the company.
In summary, unquoted shares can still potentially be accommodated in the new tax rules, despite the complications introduced by Finance Act 2006. However, there are issues and risks to consider and we would always recommend professional advice is taken before proceeding. In addition to the taxable property issues other matters need to be considered, including the difficulty (and cost) of valuing the shares on purchase from a connected party (or at a later date when a market value is needed, say on retirement) and the practical process of purchasing the shares and protecting the SIPP trustee's position. When we are buying existing shares we generally require the transaction to take place through a third party (stockbroker/lawyer) to ensure monies are only released at the appropriate time.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till