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Unquoted pitfalls

David Baker, legal director of Wealthtime, sets out some of the problems that can be encountered for Sipp providers in the area of unquoted shares

Experience of unquoted shares before A-Day was, for Sipp providers, very limited. They did not figure on HM Revenue & Customs’ permitted investments list and for that, in retrospect, we should be truly grateful.

In contrast, they were a common investment for a Ssas, usually in the sponsoring employer’s company, which, along with the loanback facility, was a neat way of obtaining tax-efficient funding from Ssass.

Things changed after A-Day. Ssass found themselves more restricted in what they could do and Sipps now had greater freedom – although not as much as was anticipated until just a few months before A-Day when reality belatedly dawned on the Government that total investment freedom could prove to be too much of a good thing.

Instead of prohibiting particular investments, the authorities created the concept of taxable property and with it a minefield for SSAS and Sipp providers.

Unquoted shares are probably the most problematic investment that a scheme is likely to be involved in. As a general statement of principle, these will count as taxable property because the company will, in practice, hold tangible moveable assets, which are taxable property, so the scheme will also indirectly hold such assets through its shareholding.

Under the legislation, this is caught unless one of the exemptions applies. It goes without saying that exemption is essential, otherwise the tax consequences for both the member and possibly even the scheme itself are Draconian.

The two exemptions that could apply are, first, if the scheme holds less than 10 per cent of the company shares, including the shares the member and any connected person might hold.

This is a useful exemption particularly for bigger private companies, which can also comply with the minimum asset criteria, perhaps where the member currently has no involvement in the company and wants to take a small stake, possibly as a prelude to an eventual float.

Generally, although care must be taken, such an investment should not cause the sort of headache that arises with the use of the second exemption.

The second exemption is available for trading concerns in which the scheme, together with the member and connected persons, holds less than 50 per cent of the shares.

In addition, neither the member nor any connected person can be a controlling director – that is, a director owning directly or indirectly 20 per cent or more of the shares.

Here, it is likely that the member already has some involvement with the company. Sometimes, it will be clear that the involvement is limited and the total share ownership will come comfortably within the rules and will not be taxable property.

Often, it will not be so clear. If there is any family involvement, for example, it may be difficult to determine whether or not the member, if a director, comes within the wide definition of a controlling director, even when he personally holds less than 20 per cent of the shares but the total family holding is more than this. Similarly, even where the member is not a director, and not even a shareholder, the connected party rules will apply. These are not just confined to family shareholdings or those of associated companies, they also cover what is a very subjective concept – the business partner.

If the member has any involvement in the company more than as a passive shareholder, then it could be argued that potentially he could be classed as a business partner of a much wider range of shareholders and directors than his family, and this range, which is very difficult to define, could, quite accidentally, tip him and his Sipp over the 50 per cent limit and into taxable property territory.

To try to cover all the possibilities in this scenario, even where the member has made comprehensive disclosure of all his and his family’s interests is a considerable challenge for the Sipp provider. Even where one is as certain as one can be that the percentages are satisfactory, the situation could change at any time by circumstances outside the member’s or the Sipp provider’s control.

Instead of prohibiting particular investments, the authorities created the concept of taxable property and with it a minefield for SSAS and Sipp providers

For example, if a member of the family buys more shares, unless the provider keeps a close eye on the share- holders’ register is likely to be unaware of the change.

To cap it all, the FSA has recently written to all small Sipp providers (although it must surely apply to bigger providers as well) suggesting that they bear at least some responsibility for the suitability of a scheme’s investments. The Sipp provider would be well advised to issue a comprehensive disclaimer and obtain an indemnity from the client, though it remains an open question how legally effective these would be should the worst happen.

Other issues of concern would be such things as valuation, which can be very complex in the context of unquoted shares, particularly involving minority holdings.

Ongoing valuation is also an issue where this is required, for example on benefit crystallisation, not least who would pay for it. The liquidity of unquoted shares could also be a problem, particularly when cash is required to provide benefits.

And let’s not forget the potential liability the Sipp trustee has as a shareholder in a company about which it may have little knowledge, yet whose vote on major issues such as a company sale or reconstruction could be crucial and even the subject of legal proceedings.


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