Stephen McPhillips: Navigating the world of unquoted shares

Stephen McPhillips looks at the unquoted shares market in relation to SIPP and SSAS investment. He says while the process is complex it can be worthwhile having gone through tough due diligence

One of the less common types of investment that might be available through self-invested personal pensions (SIPPs) and small self-administered schemes (SSAS) are unquoted equities i.e. shares in private limited companies that are not readily available to be traded and whose value is an unknown quantity until a formal valuation is undertaken.

There is, however, a plethora of such companies in the UK and SIPP providers are sometimes asked whether these types of shares can be held within a SIPP or SSAS.

The drivers for the sale of unquoted shares may vary from client to client.

Some businesses may wish to raise additional capital in order to help fund expansion, to meet a cash-flow difficulty, to acquire additional stock to fulfil a large order, to allow employees share ownership and so on. An individual who owns unquoted shares might wish to dispose of some or all of them in order to create cash for other uses.

Limited market

With a limited market for potential buyers of these shares, some clients may naturally look to a friendly and known entity as a potential buyer. In some cases, that might be a client’s SIPP or SSAS.

This then begs the question, can a SIPP or SSAS own unquoted shares? The short answer to this question is “yes – in certain circumstances”.

The more thorough answer is that, in practice, significant due diligence is required on an unquoted share purchase in order to determine whether it will cause any potential tax issues for the SIPP or SSAS.

The extent of the due diligence carried out will vary from provider to provider, if indeed the provider undertakes to carry it out on the client’s behalf. For SIPP investment, the provider would be expected to do the due diligence but for SSAS, much will depend on the nature of the services being provided by the SSAS practitioner/professional trustee.

The next question that tends to arise is, what exactly does the due diligence work need to cover? This, again, may elicit different responses from different providers.

Valuation

The first obvious aspect that springs to mind is the valuation of the shares.

Given that they are not freely traded and regularly valued, how does one place a value on the shares in that particular company? This is of even more significance if the vendor/issuer of the shares is a connected party because the transaction needs to take place on demonstrably commercial terms, in order to avoid potential tax charges.

Regardless of whether there is a connection between the parties, the price paid by a SIPP or SSAS needs to be supported by an independent valuation, which has been completed on a basis that would satisfy HM Revenue & Customs own Shares and Assets Valuations (SAV) team.

Ownership

Another key question around unquoted share ownership within SIPP or SSAS relates to the overall ownership/control of the company and the pension scheme’s position post-acquisition of the shares. Would the scheme, for example, be in any position to exercise control over the company?

This does not refer solely to the scheme’s shareholding, which might be quite small itself in percentage terms, but should also include shares owned by the scheme member personally, their family members and any other connected party. A surprisingly small intended shareholding in a company can still enable a pension scheme to exercise control in certain circumstances.

A much less obvious and hence sometimes overlooked consideration is the extent to which the company owns any “taxable property”. This includes residential property and tangible moveable property, the latter being things that can be touched and moved and includes company vehicles, computer equipment, desks, chairs, plant and machinery and so on. Such property if held, directly or indirectly (e.g. by ownership of shares in the company), by a SIPP or SSAS can give rise to unexpected and unwanted tax charges on both the scheme member(s) and the scheme.

In the case of a SSAS, a further consideration is whether the company is an employer associated with it. In this situation, investment in unquoted shares of the company could be limited to a small percentage of the SSAS fund value. This restriction does not apply to a SIPP.

Undoubtedly, unquoted share purchase through a SIPP or SSAS is complex, but it can work in some circumstances. However, due diligence is key.

Stephen McPhillips is technical sales director at Dentons Pensions Management