Tech talk
Unlisted Companies - TT28/06
In this TechTalk we shall try to clarify the rules regarding investment in shares in an unlisted company by a registered pension scheme.
S180(5) of FA2004 restricts the amount that an occupational pension scheme (OPS) can invest in any one sponsoring employer to less than 5% of the fund value at the time of the share purchase. Investment in shares in more than one sponsoring employer must be less than 20% of the fund value.
The 5% / 20% limits are tested at the time the shares are purchased and are only re-tested when further shares in the sponsoring employer(s) are purchased.
There were no other restrictions in the FA2004 with regard to investment in shares in unlisted companies.
The FA2006 introduces the concepts of "investment-regulated pension schemes" and "taxable property".
An "investment regulated pension scheme" is:-
- A SIPP under which a member (or a person related to the member) can direct, influence or advise on investment matters relating to the member's arrangement
- An OPS with no more than 50 members and at least one member (or a person related to a member) can direct, influence or advise on investment matters relating to the scheme
- An OPS where at least 10% of members (or a person related to a member) can direct influence or advise on investment matters relating to the scheme
- An OPS which is not caught by the above conditions but under which a member (or a person related to a member) can direct, influence or advise on investment matters relating to the member's arrangement.
A person is related to a member if -
a) the person is connected to the member; or
b) the person acts on behalf of the member or a person connected to the member.
A person is connected with a member if that person is the member's wife or husband, or is a relative, or the wife or husband of a relative, of the member or of the member's wife or husband.
"Taxable property" means residential property and tangible moveable property (i.e. assets that can be touched or moved such as works of art, vintage cars, fine wines etc.)
FA2006 sets out the tax charges that will apply when a scheme invests in taxable property. The legislation covers direct and indirect investments. So, for example, if a scheme invests in shares in a company which invests in residential property the scheme may be deemed to have invested in taxable property. Indirect investment in a trading company which owns taxable property is permissible if:
- the pension scheme does not have control of the company either alone or together with associated persons
- no member or person connected to a member is a controlling director of the company
- the pension scheme does not permit a member or person connected to the member to occupy or use the property
"Associated person" includes:
- a member of the scheme
- a person connected with a member
- an arrangement under any pension scheme relating to a member of the scheme or any person connected with such a member
- any associated pension scheme
Regulations exempt indirect holdings in tangible moveable property from being taxable property if:
- the market value of the asset is no more than £6000
- the asset is held indirectly by the scheme
- the asset is held solely for the administration or management of the company
- a scheme member or anyone connected to a member cannot occupy or make use of the asset
The changes introduced by FA2006 to prohibit indirect investment in residential property and tangible, moveable assets inadvertently(?) bring in new restrictions to investment in shares in a member's own company and, to all intents and purposes, prohibit such investment. Where a SSAS or a SIPP invests in shares in a connected company the scheme administrator will be obliged to check whether any asset of the company exceeds £6000 in value. Such assets would include office furniture, plant and machinery but would also include directors' cars and commercial vehicles if owned by the company.
Trustees of a SSAS who act as scheme administrator may be comfortable with taking on the task of monitoring company assets. However it is likely that independent scheme administrators and SIPP providers will find the task too onerous and will probably prohibit such investments.
As well as these restrictions a SSAS will also be limited by the 5% limit on shares in a sponsoring employer.
Investment in shares in an unconnected company are permitted and SIPP providers will have to decide whether they should allow such investments. Perceived problems with valuations and liquidity could well rule this out.
Once again HMRC has introduced complex legislation to combat possible tax avoidance and appears to have lost sight of the purpose of pensions simplification, i.e. "to cut red tape for business, to provide more flexibility and choice for those saving for a pension and to give employers and employees the flexibility to design schemes that suit their needs" (Simplifying the taxation of pensions : the Government's proposals, 10 December 2003).
Ian Westwater - August 2006