Investing in Unlisted Shares – A Connected company

A client wants to purchase shares in their own company via their SIPP, but isn’t sure whether this is possible due to the connected nature of the parties.

The Challenges

Moe is Finance Director of a successful electrical contractor business, specializing in the installation of solar panels. The business is located in the UK and has been trading for 9 years, Moe has been a director for 7 years and has a detailed understanding of the business, its future prospects and the overall industry.

With the cost of living crisis and the significant rise in electricity prices, the company has seen a significant influx of business with people installing solar panels on their homes. The company has the intention to expand the business to allow them to trade over a wider area throughout the UK.

Moe isn’t a controlling Director. He has an 18% shareholding, his co-Directors and shareholders are all unconnected to him.

Moe is considering the tax efficiency of holding his shares in his personal capacity. He does have a pension of around £500,000 and has a proportion of cash to invest so is considering his investment options. Moe acknowledges that he has been passive when it comes to his pension and he now wants to take a more hands on approach to his retirement planning.

Moe wants to understand whether he is holding his company shares in the most tax efficient way, so he speaks with his financial adviser Matthew to understand more.

The Actions

Matthew explains that whilst Moe holds the shares in his personal capacity, he is exposed to potential capital gains tax implications if the shares increase in value (which Moe anticipates as part of the company expansion). Additionally, the share dividends may result in associated income tax implications.

Matthew suggests some options to mitigate potential tax implications for Moe:

• He could sell his shares (but this would result in a loss of control and would remove any ability to benefit from future growth and dividend payments)
• Transfer his shares to his spouse
• He could hold his shares in a tax exempt environment, i.e. a SIPP

Moe informs Matthew that he would like to keep control of the shares himself, but is interested in holding these via a SIPP. He asks what the benefits of this would be. Matthew explains that there are multiple tax advantages of having a SIPP including tax relief on contributions, and any employer contributions would benefit from corporation tax relief. In terms of specific benefits in holding the shares in a SIPP, Matthew explains that Moe would benefit from:

• Capital gains exemption on future disposal
• Income tax exemption on dividends received into the SIPP

Matthew tells Moe that as the company is not on a stock exchange, the shares are considered unlisted. The shares would be categorized as a non-standard investment as they are not market traded or a regulated investment.

Moe is really excited by this idea, and Matthew explains that there are some other considerations if a SIPP is used to hold the shares which include:

• The SIPP administrator will need to undertake due diligence on the company to ensure that the unlisted shares satisfy both HMRC and provider requirements;
• The SIPP administrator will need to consider any advice Moe has received from Matthew and ensure Moe satisfies the FCA’s criteria for investing in unlisted shares
• The SIPP administrator will need to be comfortable with the terms of any shareholder agreement (for example, to ensure that the SIPP isn’t prejudiced by bad leaver provisions)
• An independent share valuation will be required to satisfy HMRC connected party regulations to determine fair value for the share purchase, and also at the point of any benefit crystallisation event and end disposal
• Stamp duty will be payable by the SIPP and capital gains tax may be payable by Moe on the sale of shares to the SIPP
• As there is no trading market for unlisted shares, Moe will need to demonstrate an exit strategy for the shares which will compliment his retirement objectives
• Upon the sale of unlisted shares any income drawn from Moe’s pension during retirement would be taxed at his marginal rate of income tax.

The Results

Moe and Matthew agree that a SIPP would be the most appropriate vehicle through which Moe should look to hold his unlisted shares. This will enable the shares to be held in a tax advantageous environment and also for Moe to begin proactively investing his pension and aim to grow his SIPP this in advance of his eventual retirement.

Moe provides a completed Specialist Investment Questionnaire form to enable Curtis Banks to undertake the required due diligence in advance of investment and SIPP establishment. Matthew arranges for Moe to complete an application form for Your Future SIPP with Curtis Banks.

This information is based on our understanding of current legislation, including (but not limited to) FCA, PRA and HMRC regulation. It does not constitute any form of advice.