January 2008

Advertising Feature

Share and share alike

One of the newest asset classes that became allowable following A-Day was the ability to invest in unquoted shares. These are shares of a private limited company which are not traded on a recognised stock exchange, such as the London Stock Exchange.

Many SIPP operators have opted to stay out of this arena, probably because they do not have the processes or technical expertise to deal with the risks involved. We would always recommend that anyone looking to invest in unquoted shares reads all information available and seeks professional advice.

Although an investment in unquoted shares by a SIPP is in itself permitted, one needs to consider carefully whether the investment could be seen by the HM Revenue & Customs (HMRC) as an indirect investment in taxable property. The legal definition of taxable property is much wider than one might think.

If your SIPP is deemed to have invested indirectly in taxable property when buying an unquoted share, you will be personally liable for tax charges of at least 40% of the market value of the interest in the property your SIPP is deemed to have acquired. Additionally your SIPP could suffer a further 15% charge, or more. Such tax charges will not arise, however, if your investment is in what HMRC describes as a genuinely diverse commercial vehicle.

Basically, a genuinely diverse commercial vehicle ('GDCV') is:

- An arm's length trading company, which meets certain qualifying criteria, of which neither you nor anyone connected with you are a controlling director;

- A real estate investment trust (subject to certain conditions); or

- A special purpose vehicle which meets certain qualifying criteria - one of which is that neither you nor anyone associated with you, collectively or alone, owns or has beneficial interest in 10% or more of the company's shares.

What constitutes 'taxable property'?

Taxable property is property which if held by a registered pension scheme, such as a SIPP, would result in HMRC imposing penalty tax charges on your investment. The term taxable property catches two types of property:

- Residential property; and

- Items that HMRC refer to as 'tangible moveable property' (property which you can touch and move).

It is the last item which generally causes the problems with unquoted share investments. The only forms of tangible moveable property not viewed as taxable property are investment grade gold bars and such tangible moveable property that satisfies the following criteria:-

- The market value of the property is less than £6,000 (per item);

- Your SIPP does not hold the asset directly, but it is held indirectly through a company, for example;

- The asset is held solely for the administration and management of the company which owns it; and

- Neither the member nor anyone connected to them can either personally occupy or have personal use of the asset.

HMRC interprets the term 'solely for the administration and management of the company' very narrowly. For example, it is likely to catch any goods produced by a trading company (even if fairly low in value). Examples of this sort of property include items such as desks, computers, chairs, carpets, kettles and small items of office equipment.

So what will be a 'genuinely diverse commercial vehicle'?

The list below is not exhaustive, but if any of the statements in the matrix below do, or might, apply to your circumstances then the investment will probably be in a company which does not qualify as a GDCV. Penal tax charges could therefore be incurred.

1. If the company in which you propose to invest has as its main activity the carrying on of a trade, profession or vocation, and ...

- you or another member of the SIPP (or someone who is connected to you or another member) are a director involved in the management of the company, or another company which holds an interest in that company. The aggregate beneficial shareholding in that company held by you and/or other members of the SIPP (and anyone connected to you or other members) in the relevant company should come to 20% or more of the company's ordinary share capital; OR

- you, the SIPP as a whole or someone or a company otherwise connected with you or other members of the Pointon York SIPP will collectively be deemed to have 'control' of the company after the share acquisition (under the normal taxation rules on 'control' for general company taxation purposes).

2. If the company in which you propose to invest does not have as its main activity the carrying on of a trade, profession or vocation, and ...

- it is a 'close company' for tax purposes, or would be, if UK resident; OR

- the company has assets of less than £1 million and holds less than three assets which consist of an interest in residential property; OR

- an asset of the company which qualifies as taxable property has a value of more than 40% of the company's total assets; OR

- the company's main purpose, or one of its main purposes, is the direct or indirect holding of an animal or animals for sporting purposes (e.g. racehorses); OR

- you or any person company connected to you have collectively a 10% interest in the company. This collective measure catches any interests held indirectly, either by you or a person connected to you, through a pension scheme or another trust.

3. One of the purposes, for the Pointon York SIPP holding an interest in the company is to enable you, another member of the Pointon York SIPP or someone connected with you or such member, to have personal use of or to occupy taxable property.

Where dealing with a 'close company' (broadly a company controlled by five or fewer persons), only a trading company can be a GDCV. However, judging whether that company meets the other GDCV conditions is difficult. Here, the collective interests of all the SIPP members held either personally or in the SIPP, with the interests of all persons connected to those members, must not represent a controlling interest in the company.

What exactly are the tax consequences of being deemed to invest "indirectly" in "taxable property?

Both you and your SIPP will become liable to a tax charge based on the indirect interest the SIPP is deemed to have in the taxable property held by the company at the point the SIPP acquires the shares.

If your SIPP is buying shares from a connected party the SIPP must ensure that the share acquisition takes place on an arm's length basis at full "market value" (section 272 of The Taxation of Chargeable Gains Act 1992). Failure to do so could lead to tax penalties being imposed on you or your SIPP.

- Christine Hallett is chief executive of Pointon York SIPP Solutions.

Christine Hallett
Chief Executive
Pointon York SIPP Solutions