Notes for Guidance on Pension Scheme Investment in Unquoted Shares

Transcription

1 Notes for Guidance on Pension Scheme Investment in Unquoted Shares (For James Hay Modular isipp, Partnership SIPP, IPS Partnership SIPP, IPS (2008) SIPP, IPS Pension Builder, Family SIPP and SSAS only) We will only consider Unquoted Share investments that have been recommended by a regulated Financial Adviser.

2 type of arrangement known as Investment Regulated Pension Schemes, or Member The type of Directed pension Pension vehicle Schemes. that can be used for this purpose is the self-administered scheme. There NOTES have traditionally FOR GUIDANCE been two types, ON PENSION the Self Invested SCHEME Personal Pension The (SIPP) aim for of these individuals, notes is and to assist the Small Pension Self-Administered Scheme Trustees Scheme in buying (SSAS) unquoted for shares, companies. and From to ensure April INVESTMENT that 2006 any the problems rules IN surrounding UNQUOTED are avoided. permissible SHARES These investments of are SSAS not straightforward and SIPP are broadly and it is the advisable same (apart to discuss from one plans exception) with us effectively before proceeding creating and one Pension The seek type pension advice of regulations arrangement from regulations a suitably permit known introduced pension qualified as schemes Investment on independent the 6 th to April purchase Regulated financial 2006 unquoted permit adviser. Pension pension shares Schemes, schemes both in UK to or and purchase Member overseas Directed unquoted companies, Pension shares although Schemes. both in this UK is and subject overseas to various companies, retrictions. although this is subject to various restrictions. The GENERAL aim aim of of these PRINCIPLES these notes notes is is to to assist assist Pension Pension Scheme Scheme Trustees Trustees and in Members buying unquoted in buying The unquoted shares, type and of shares, pension to ensure and vehicle to that ensure that any that can problems any be used problems are for avoided. this are purpose avoided. These is These the investments self-administered investments are are not scheme. not An straightforward unlisted/unquoted There have and and it traditionally company is you advisable must means seek been to advice discuss two a company types, from plans a the suitably which Self with Invested us is qualified not before officially Personal Financial proceeding listed Pension Adviser. and a (SIPP) recognised seek advice for stock from individuals, exchange a suitably and within qualified the the Small independent meaning Self-Administered of Section financial 841 adviser. ICTA Scheme (SSAS) for companies. From April 2006 the rules surrounding permissible investments of SSAS and It is SIPP important are broadly to be able the same to demonstrate (apart from that one the exception) sole purpose effectively of establishing creating one a type pension GENERAL of scheme arrangement PRINCIPLES is not known to buy as unquoted Investment shares, Regulated as this could Pension be deemed Schemes, as tax or Member avoidance Directed under the Pension Income Schemes. & Corporation Taxes Act 1988 (s 707) or the regime for disclosure An unlisted/unquoted of tax avoidance company schemes means in a the company Finance which Act 2004 is not (Part officially 7). This listed easier on a The to recognised demonstrate aim of stock these if exchange notes (a) the is scheme to within assist the is Pension meaning set up some of Scheme of section Section time Trustees 1005(3) before 841 ICTA Income the in buying purchase Tax unquoted Act takes shares, place and and (b) to the ensure balance that of any the assets problems are are invested avoided. in other These asset investments classes. are not straightforward It is is important to and to be be able it able is to advisable demonstrate to demonstrate to discuss that the that plans sole the purpose with sole us purpose of before establishing of proceeding establishing a pension and a seek If scheme pension there advice is scheme any not from to doubt, buy a is suitably not unquoted prior to clearance qualified buy shares, unquoted independent can as this be shares, could sought financial as be from deemed this adviser. Her could as Majesty s be tax deemed avoidance. Revenue as This tax & Customs is avoidance easier to (HMRC). under demonstrate the This Income is if a (a) process & the Corporation scheme that you is Taxes set would up Act need some 1988 to time (s do 707) prior before to the the approaching regime purchase for us takes disclosure to arrange place of and tax the (b) avoidance investment. the balance schemes of the in assets the Finance are invested Act 2004 in other (Part asset 7). This classes. is easier GENERAL to demonstrate PRINCIPLES if (a) the scheme is set up some time before the purchase takes There place and are (b) a number the balance of circumstances of the assets are whereby invested the in purchase other asset of classes. unquoted shares An could unlisted/unquoted involve the pension company scheme means member(s) a company or sponsoring which is not employer officially and listed pension a recognised fund If there in substantial any stock doubt, exchange tax prior charges. clearance within The the meaning first can step be sought of is Section therefore from 841 Her to ICTA establish Majesty s whether Revenue the & proposed Customs (HMRC). share purchase This is is a allowable process that as a you pension would scheme need to investment, do prior to or approaching whether it It will us is to incur important arrange tax charges the to investment. be effectively able to demonstrate rendering it forbidden. that the sole This purpose is a complex of establishing area. a pension scheme is not to buy unquoted shares, as this could be deemed as tax avoidance There are under a number the Income of circumstances & Corporation whereby Taxes the Act 1988 purchase (s 707) of unquoted or the regime shares for disclosure TAXABLE could involve of PROPERTY tax the avoidance pension AND schemes THE PRINCIPLE member(s) in the Finance OF or sponsoring INDIRECT Act 2004 INVESTMENT (Part employer 7). This and is pension easier to fund demonstrate in substantial if (a) tax the charges. scheme The is set first up step some is therefore time before to establish the purchase whether takes the place Taxable proposed and property share (b) the purchase balance consists of is of the allowable residential assets as are a property invested pension and scheme in other tangible tangible asset investment, moveable classes. or whether property property it (e.g. will incur art, tax antiques, charges stamps, effectively fine rendering wine, jewellery, it forbidden. cars, office This is equipment a complex etc). area. Indirect If investment there is any in taxable doubt, prior property clearance via unquoted can be shares sought of from a company Her Majesty s that holds Revenue taxable & Customs property is (HMRC). included This in the is definition. a process that you would need to do prior to approaching us TAXABLE to arrange PROPERTY the investment. AND THE PRINCIPLE OF INDIRECT INVESTMENT Apart from some specific exceptions, UK Pension Schemes are not permitted to invest There in taxable are property a number (directly of circumstances or indirectly) whereby without paying the purchase substantial of unquoted tax charges. Taxable property consists of residential property and tangible moveable property shares could involve the pension scheme member(s) or sponsoring employer and pension fund in substantial tax charges. The first step is therefore to establish whether the proposed share purchase is allowable as a pension scheme investment, or whether it will incur tax charges effectively rendering it forbidden. This is a complex area. TAXABLE PROPERTY AND THE PRINCIPLE OF INDIRECT INVESTMENT Taxable property consists of residential property and tangible moveable property

3 property is included in the definition. Apart from some specific exceptions, UK Pension Schemes are not permitted to invest in taxable property (directly or indirectly) without paying substantial tax charges. Examples of an indirect interest in taxable property are: 1. A pension scheme holds 100% of the share capital of a company which itself owns a residential property. The pension scheme therefore indirectly holds a 100% interest in the residential property. 2. A pension scheme holds 100% of the shares in company A and company A holds 50% of the shares in company B which owns an art collection. The pension scheme indirectly holds an interest in company B of 50% (i.e. 100% x 50%) and therefore a 50% interest in the art collection. 3. A pension scheme holds 20% of the shares in company A, which holds 50% of the shares in company B that holds 40% of the shares in company C that owns residential property. The pension scheme holds an indirect interest in company B, of 10% (i.e. 20% x 50%), and company C, of 4% (i.e. 20% x 50% x 40%), and therefore indirectly holds a 4% interest in the residential property. The extent of a pension scheme s interest in a company (and thereby its taxable property) is determined by whichever of the following gives the pension scheme the greatest interest in the company: the percentage of the share capital or issued share capital of the company owned by the pension scheme, the percentage of the voting rights in the company owned by the pension scheme, the percentage of all the income of the company to which the pension scheme has a right, the percentage of the amounts distributed on a distribution in relation to the company to which the pension scheme has a right, the percentage of of the assets of of the the company to which to which the the pension pension scheme scheme has a has right a right on winding on a winding up or in up any or in other any circumstances, other circumstances, where a pension scheme has a right to a percentage of a particular asset of the company, or of the income or gains derived from such an asset, that percentage. IF A If COMPANY a company HAS has ABSOLUTELY absolutely no NO taxable TAXABLE property, PROPERTY, for example FOR an EXAMPLE investment AN company INVESTMENT which COMPANY merely holds WHICH commercial MERELY property, HOLDS then COMMERCIAL under HMRC rules the PROPERTY, pension scheme THEN THE can PENSION own up to SCHEME 100% of CAN its shares. OWN UP However, TO 100% in practice, OF ITS it is SHARES unlikely that most companies will meet this criteria.

4 PURCHASE OF SHARES IN SPONSORING COMPANIES OF AN PURCHASE OCCUPATIONAL OF SCHEME SHARES (SSAS) IN SPONSORING COMPANIES OF AN OCCUPATIONAL SCHEME (SSAS) There are limits on the total value of shareholdings in its sponsoring employer(s) that an There occupational are limits scheme on the can total purchase. value of shareholdings The market value in its of sponsoring the shares employer(s) at purchase that must an occupational be less than: scheme can purchase. The market value of the shares at purchase must be less than: 5% of the market value of the scheme's assets in any one sponsoring employer. 5% 20% of of the the market value value of of the the scheme's assets in where any one the sponsoring shareholdings employer. relate to more 20% of than the one market sponsoring value of employer. the scheme assets where the shareholdings relate to more than one sponsoring employer. These shareholding limits only apply to schemes that are classed as occupational These pension shareholding schemes as defined limits only in the apply Finance to schemes Act that This are means classed that a as SIPP occupational could be pension 100% invested schemes in shares as defined of the in the member's Finance employer Act on This the means basis that the a SIPP could was not be 100% defined invested as an occupational in shares of scheme the member's and that employer the specific on the circumstances basis that the of SIPP the member was not defined did not deem as an the occupational investment scheme to be classed and that as the taxable specific property circumstances e.g. if the member of the member was a did controlling not deem director the investment of the company. to be classed as taxable property e.g. if the member was a controlling director of the company. INVESTMENT IN TAXABLE PROPERTY VIA UNQUOTED SHARES WHICH INVESTMENT INCURS NO TAX IN CHARGES TAXABLE PROPERTY VIA UNQUOTED SHARES WHICH INCURS NO TAX CHARGES Indirect investments held through certain kinds of commercial vehicle will not be Indirect investments held held through through certain certain kinds kinds of commercial of commercial vehicle vehicle will not will be not subject subject to tax charges when held as a scheme investment by an investment be subject to tax charges to tax when charges held as when a scheme held investment as a scheme by a registered investment pension by an scheme. investment These regulated pension scheme. These are called Genuinely Diverse Commercial regulated are called Genuinely pension scheme. Diverse Commercial These are Vehicles called Genuinely of which there Diverse are three Commercial types: Vehicles of which there are three types: Vehicles of which there are three types: 1. Trading Concerns concerns 1. Trading Concerns These are arm's length trading vehicles. There are four conditions to be met: These are arm's length trading vehicles. There are four conditions to be met: 1. The vehicle s main activity is the carrying on of a trade, profession or vocation 1. The (i.e. it vehicle s is not an main investment activity company). is the carrying on of a trade, profession or vocation 2. The (i.e. it pension is not an scheme investment either company). alone or together with associated persons does 2. The not have pension control scheme of the either vehicle. alone or together with associated persons does 3. Neither not have a control pension of scheme the vehicle. member nor a person connected to such a member 3. Neither is a controlling a pension director scheme of the member vehicle nor (i.e. a person owns or connected controls 20% to such or more a member of the share is a controlling capital) director any of other vehicle (i.e. which owns holds or controls an interest 20% in or more the vehicle of the directly share capital) or indirectly. or any other vehicle which holds an interest in the vehicle 4. The directly pension or indirectly. scheme does not directly or indirectly hold an interest in the 4. The vehicle pension for the scheme purposes does of not enabling directly or a pension indirectly scheme hold an member interest in or the a connected vehicle for person the purposes of such a of member enabling to occupy a pension or use scheme residential member or tangible or a moveable connected property. person of such a member to occupy or use residential or tangible moveable property. 2. Other Kinds kinds Of of vehicle Vehicle 2. Other Kinds Of Vehicle These are often established as as Unit Trusts, Open Ended Investment Companies or or other These pooled are often arrangements. established as Unit Trusts, Open Ended Investment Companies or other pooled arrangements. If If a vehicle vehicle meets meets certain certain conditions, conditions, where where the pension the pension scheme scheme, and associates and associates, directly or directly If a indirectly vehicle or indirectly own meets 10% certain own or 10% less conditions, and or less there and where is there no right the is no pension to have right to private scheme, have use private and of any associates, use taxable of any property, taxable directly or property they indirectly will they not own be will subject 10% not be or subject to less a tax and to charge. there a tax charge. is no right to have private use of any taxable property they will not be subject to a tax charge.

5 The pension scheme together with any connected person (see (see below for for a definition a of connected of parties parties but note but note this includes this includes other members other members of the same of the pension same pension scheme e.g. scheme a SSAS e.g. a but SSAS not a but SIPP) not a must SIPP) not must hold not directly hold directly or indirectly or indirectly 10% or 10% more of more the share of the capital share or capital issued or share issued capital share of capital the vehicle, of the or vehicle, 10% or more 10% of the or more voting of rights the voting the vehicle, rights in or the a right vehicle, to receive or a right 10% to or receive more 10% of the or income more of the income vehicle, of or the an interest vehicle, in or the an vehicle interest giving in the rise vehicle to income giving and rise gains to income derived and from gains a specific derived property from a of specific more property than 10%. of more than 10%. The The vehicle vehicle must must meet meet three three conditions: conditions. Condition 1 The total value of the assets held directly by the vehicle is at least 1 million, or The vehicle holds at least three assets directly which are residential property, none of which has a value which exceeds 40% of the total value of the assets. Condition 2 If the vehicle is a company it is not a close company (i.e. controlled by five or fewer parties), or the equivalent in its country of residence. Condition 3 The vehicle does not have as its main purpose, or one of its main purposes, the direct or indirect holding of an animal(s) used for sporting purposes. This is to recognise that many racehorse syndicates have many members and provide them with certain benefits related to the horse ownership such as attendance at race meetings as an owner with access to the owner's enclosure. The pension scheme s interest in the vehicle must meet the following conditions: 1. There is no right to private use of any taxable property owned by the vehicle. 2. The pension scheme must not directly or indirectly hold an interest in the vehicle for the purposes of enabling a member of the pension scheme or a connected person to occupy or use residential property or tangible moveable property. 3. These limits apply to indirect holdings of a vehicle as well. So if a pension scheme holds 50% of company A which in turn owns 15% of company B then the pension scheme s interest in company B will be 7.5%. The indirect holding in company B will therefore be less than 10%.

6 3. UK REITs REITS 3. UK REITS UK REITS REITs are companies to which Part 4 of Finance Act 2006 (UK Real Estate UK Investment REITS Trusts) are companies applies or to or a which member a member Part of a 4 of group of a Finance group to which to Act that which 2006 part that (UK applies. part Real applies. Estate Investment Trusts) applies or a member of a group to which that part applies. The pension scheme's interest in the UK REIT must meet the following conditions. The pension scheme's interest in the UK REIT must meet the following conditions. The pension scheme The pension scheme Must not directly or indirectly hold an interest in the UK REIT for the purposes of Must enabling not directly a member or indirectly of the hold pension an interest scheme in the or UK a connected REIT for the person purposes of a member of enabling to occupy a member or use of the the property, pension and scheme or a connected person of a The member pension to occupy scheme or use together the property, with any and connected person must not hold directly The pension or indirectly scheme 10% together or more with of the any share connected capital or person issued share must capital not hold of the directly UK REIT, or indirectly or 10% 10% or more more of the of the voting share rights capital in the or issued UK REIT, share or capital a right of to receive the UK REIT, 10% or or more 10% or of more the income of the of voting the UK rights REIT, in the or UK an REIT, interest or in a the right UK to REIT receive giving 10% rise or more to income of the and income gains of derived the UK from REIT, a specific or an interest property in of the more UK than REIT 10%. giving rise to income and gains derived from a specific property of more than 10%. Low value holding of taxable property Low Value Holding Of Taxable Property Where Low Value the company Holding Of concerned Taxable Property is not classed as a genuinely diverse commercial vehicle Where (for the example company if concerned the pension is scheme not classed member as a and/or genuinely connected diverse persons commercial owns or Where vehicle controls the (for 20% example company or more if concerned the of pension the company), is scheme not classed and member low as value a and/or genuinely taxable connected diverse property persons commercial is owned owns by vehicle or controls a company (for 20% example for or use more if in the the of pension the normal company), scheme operation and member of low its business, value and/or taxable connected this is property only persons exempt is owned owns from being or by controls a company treated 20% as for or taxable use more in property the of the normal company), in the operation following and of low its circumstances: business, value taxable this is property only exempt is owned from by being treated as taxable property in the following circumstances: 1. a company Its market for value use is in less the normal than 6,000. operation of its business, this is only exempt from being treated as taxable property in the following circumstances: It Its is held market for value the purpose is less of than management 6,000 or administration of the company Its is market held for value the purpose is less than of management 6,000 or administration of the company No It No is direct held direct ownership for the purpose is permitted is of permitted management by the by pension the or administration pension fund only fund indirect of the only company via indirect purchase via 3. of No purchase shares. direct of ownership shares is permitted by the pension fund only indirect via 4. No member or connected person uses (or has a right to use) the asset 4. No purchase member of or shares connected person uses (or has a right to use) the asset. 4. No member or connected person uses (or has a right to use) the asset The fourth point usually means that controlling directors and those who have a direct The fourth or indirect point usually control means of 20% that or controlling more of the directors company and those cannot who purchase have a shares direct or with indirect their control pension of scheme 20% or because more of they company have the cannot right to purchase use the equipment shares with (telephones, their pension computers, scheme etc) because of the company. they have the right to use the equipment (telephones, computers, etc) of the company. VALUE SHIFTING VALUE SHIFTING It is possible to pass value from a pension scheme without making any payment. For It example, is possible an to individual pass value is a from member a pension of a pension scheme without scheme making which owns any payment. 10% of For the example; class example, A shares an individual a company, is is a a member while of the a of individual pension a pension scheme personally scheme which owns which owns 10% owns 10% of 10% of the the class of class the B A shares. class shares A shares in a company, in a company, while the while individual the individual personally personally owns 10% owns of 10% the class of the B class shares. B shares. Originally both class A A and and class class B shares B shares have have similar similar rights, rights, but if but the class if the A class shares A then shares Originally change then both change their class rights their A so and rights they class no so longer B they shares no carry longer have the carry right similar to the rights, dividends, but to dividends, then if the value class then has A been value shares passed has then been change to the passed class their to B rights shares, the class so and they B therefore shares, no longer and to carry therefore member right to without the to member dividends, any payment. without then Such any value payment. shifting has been of Such value passed shifting is taxable. to the of value class is B taxable. shares, and therefore to the member without any payment. Such shifting of value is taxable.

7 WHEN DOES A TAX CHARGE APPLY TO AN INDIRECT HOLDING OF TAXABLE PROPERTY? WHEN DOES A TAX CHARGE APPLY TO AN INDIRECT HOLDING OF TAXABLE PROPERTY? Where a pension scheme invests in shares of an unquoted company which holds taxable property, and the company is not classified under one of the exemptions Where explained a pension above, scheme then it is invests treated in as shares making of an an unquoted Unauthorised company Payment. which holds The taxable specific circumstances property and the where company unauthorised not classified payment under occurs one are of the the following: exemptions explained above, then it is treated as making an Unauthorised Payment. The specific circumstances acquiring where the taxable an unauthorised property indirectly payment occurs are the following: increasing interest in an indirect holding improvement acquiring the taxable of taxable property property indirectly, held indirectly to increase its value the increasing vehicle interest increases an its indirect holding holding, of taxable property conversion improvement of of non-taxable property held into indirectly taxable to property increase its value, value the vehicle shifting increases its holding of taxable property, conversion of non-taxable property into taxable property, In each of these instances, the purchase/conversion cost (or open market value if greater), value or increased/decreased shifting. value of the taxable property will be the amount In subject each to of a these tax charge. instances, the purchase/conversion cost (or open market value if greater), or increased/decreased value of the taxable property, will be the amount subject to a tax charge. THE TAX CHARGES THAT WILL APPLY THE In the TAX circumstances CHARGES THAT outlined WILL above APPLY where an unauthorised payment is deemed to have occurred, the consequent tax charges (and possible allowances) are as follows: In the circumstances outlined above, where an unauthorised payment is deemed to have Acquisition occurred, the consequent tax charges (and possible allowances) are as follows: Acquisition The amount spent on acquiring an indirect interest in taxable property is subject to an Unauthorised Payment Charge of 40% on the pension scheme member and a The Scheme amount Sanction spent Charge on acquiring of 15% an indirect on the scheme interest Administrator in taxable property a total is subject charge of to an 55%. Unauthorised Payment Charge of 40% on the pension scheme member and a Scheme Sanction Charge of 15% on the scheme Administrator a total charge of 55%. If more than 25% of the pension fund value is spent on the investment, a further Unauthorised Payment Surcharge of of 15% 15% is is levied levied on on the the member, member, taking taking the the total total tax charge tax charge to 70%. to 70%. If the If amount the amount spent spent on acquiring on acquiring the investment the investment is not the is not market the market value, the value, market the value market must value be used must for be this used purpose. for this Some purpose. examples Some are examples as follows: are as follows: The pension scheme owns 50% of a company and that company acquires a The residential pension property scheme for owns 100, % The of a unauthorised company and payment that company will be acquires 50,000. a residential The pension property scheme for holds 100, % The of unauthorised company A which payment in turn will holds be 50, % of The company pension B. Company scheme holds B acquires 100% of a company residential A property which in for turn 100,000. holds 50% The of company unauthorised B. Company payment will B be acquires 50,000. a residential property for 100,000. The unauthorised payment will be 50,000 The pension scheme holds 50% of company A which in turn holds 50% of The pension scheme holds 50% of company which in turn holds 50% of company company B. B. Company Company B acquires acquires a residential residential property property for for 100, ,000. The The unauthorised unauthorised payment payment will will be be 25,000 25,000. Annual Tax Charge An annual Scheme Sanction Charge of 40% of the income derived from the investment is also payable by the pension scheme Administrator for as long as it deemed continues as to being held 10% by (increased the pension by scheme. RPI each If year). the income An example is less is than as follows: 10% p.a. it is deemed as being 10% (increased by RPI each year). An example is as follows: A pension scheme holds 50% of company A which holds 50% of company B. A Company pension B scheme holds a holds residential 50% of property company for A the which entire holds tax year. 50% of The company income B. is Company 10,000. The B holds pension a residential scheme is property chargeable for the to entire a scheme tax year. sanction The charge income on is 10,000. 2,500 (i.e. The 10,000 pension x 50% scheme x 50%). is chargeable to a scheme sanction charge on 2,500 In the above (i.e. 10,000 example, x 50% if Company x 50%). B pays tax of 2,000 on the income, a In the above example, if Company B pays tax of 2,000 on the income, a

8 pension scheme holds 50% of company which holds 50% of company B. Company A pension scheme holds holds residential 50% of property company for A the which entire holds tax year. 50% of The company income B. is 10,000. Company The B holds pension a residential scheme is property chargeable for the to entire scheme tax year. sanction The charge income on is 2,500 10,000. (i.e. The 10,000 pension 50% scheme 50%). is chargeable to a scheme sanction charge on 2,500 In the above (i.e. 10,000 example, x 50% if Company x 50%). pays tax of 2,000 on the income, In credit the for above tax paid example, of 500 if Company is allowed B pays to be tax set of against 2,000 the on tax the due income, on the a scheme credit for sanction tax paid charge of 500 (i.e. is 2,000 allowed 50% to be 50%). set against the tax due on the scheme sanction charge (i.e. 2,000 x 50% x 50%). Disposal Disposal 40% Capital Gains Scheme Sanction Charge is payable by the pension scheme Administrator A 40% Capital on Gains disposal Scheme of the Sanction asset. Charge is payable by the pension scheme Administrator pension disposal scheme of holds the asset. 100% of company and the company owns residential A pension property. scheme holds The unauthorised 100% of a company payment and charged the company on the pension owns a scheme residential in relation property. to the The acquisition unauthorised of the payment asset was charged 100,000. on The the pension scheme disposes in relation of to 50% the acquisition of its shares of in the the asset company was 100,000. when the market The pension value of scheme the asset disposes 200,000. of 50% of its shares in the company when the market value The of the cost asset of is the 200,000. asset for the purposes of the capital gains computation is The taken cost to of of be the the 50% asset of for the for the the unauthorised purposes of the of payment capital the capital gains i.e. gains computation 50,000. computation The is taken sale is to taken proceeds be 50% to be are of 50% the deemed unauthorised of the to be unauthorised 50% payment of the i.e. payment market 50,000. value - i.e. The of 50,000. sale the proceeds property The sale are i.e. deemed proceeds 100,000. to are The be 50% deemed taxable of the gain to market be is therefore 50% value of of the 50,000. market property value i.e. 100,000. of the property The taxable i.e. gain 100,000. If the is therefore company The taxable 50,000. subsequently gain is therefore disposes 50,000. of its holding in the property for 250,000. If the company The amount subsequently of unauthorised disposes disposes of its payment of holding its holding charged the property in in the relation for property 250,000, to the for the 250,000. asset amount was 100,000. The of unauthorised amount However of unauthorised payment 50,000 charged was payment used in in charged relation the previous to in the relation capital asset to gain was the 100,000. asset and therefore was However, 100,000. only 50,000 50,000 However is was available 50,000 used in to was the set previous used against this the capital previous gain. gain and capital therefore gain only and When therefore 50,000 company is only available 50,000 disposes to set available of against the property this to set gain. the against pension this gain. scheme held 50% of When that company. the company Therefore disposes the of consideration the property, for the the pension disposal scheme is deemed held 50% to be of that 50% company. of the actual Therefore sale proceeds. the the consideration for for the the disposal disposal deemed is deemed to be to 50% be of 50% The the capital of actual the actual gain sale is proceeds. sale therefore proceeds. based on deemed sale proceeds of 125,000 and costs The capital of 50,000, gain is giving therefore taxable based gain on deemed of 75,000. sale proceeds of 125,000 and costs If any of tax 50,000, is paid giving on the a taxable disposal gain of of the 75,000. property by the company, this is If allowed any tax tax to is be is paid paid offset on on the against the disposal disposal any of tax the of charged property the property on by the the capital by company, the gain company, this as is scheme allowed this is to allowed sanction be offset to charge. be against offset The any against amount tax charged any allowed tax charged on to the be capital offset on the is gain capital the as proportion a gain scheme as a of sanction scheme the tax charge. sanction paid that The charge. relates amount to The the allowed amount pension to allowed scheme s be offset to be is holding the offset proportion in is the the company. proportion of the tax Therefore of paid the that tax if relates paid the pension that to relates the scheme pension to the holds scheme s pension 50% holding scheme s of the vehicle, in the holding company. 50% in the of Therefore the company. tax is if allowed Therefore the pension as if scheme the deduction. pension holds scheme 50% of holds the vehicle, 50% of 50% the vehicle, of the tax 50% is allowed of the tax as a is deduction. allowed as a deduction. In addition, if the unauthorised payment in any scheme year exceeds 25% of the total In fund addition, value, if HM the Revenue unauthorised Customs payment has in discretion any scheme to withdraw year exceeds the scheme s 25% of the tax total fund exempt value, status, HM which Revenue incurs & Customs further tax has charges. discretion to withdraw the scheme s tax exempt status, which incurs further tax charges. Clearly, these tax charges are very high, and make pension scheme investment in Clearly, taxable property these tax completely charges are unfeasible. very high, and make pension scheme investment in taxable property completely unfeasible. It must also be stressed that it is the responsibility of the pension scheme member(s) It must also to be inform stressed us of that any it is occurrences the responsibility which involve of the pension an unauthorised scheme payment, member(s) so to this inform can us be of reported any occurrences to to HM Revenue which & involve Customs an in (HMRC) unauthorised the quarterly in the quarterly payment, Accounting Accounting so this For Tax can be For return, reported Tax and return, to the HM and appropriate Revenue the appropriate & tax Customs paid. tax Failure in paid. the to Failure quarterly make to make Accounting report a report the quarterly For in the Tax quarterly return, will return and incur the will appropriate incur fine from a fine the tax from Revenue paid. HMRC Failure on the to pension make a scheme report in of the up up quarterly to to 3,000. return Neither Neither will James incur IPS Hay nor a fine Partnership the from scheme the Revenue nor Trustees the scheme on are the liable Trustees pension for are scheme liable of for up these to penalties, 3,000. Neither and they IPS are nor therefore scheme payable Trustees from the are pension liable fund. for Scheme sanction charges levied on the scheme Administrator must be paid from the pension fund. Neither James Hay Partnership nor the Trustees are liable. James Hay Partnership will assess an unquoted investment prior to transaction and it is the responsibility of the pension scheme member(s) to inform James Hay Partnership of any changes in circumstances that could result in the investment being classed as taxable property.

9 from the pension fund. Neither IPS nor the Trustees are liable. IPS will assess an unquoted investment prior to transaction and it is the responsibility of the pension scheme member(s) to inform IPS of any changes in circumstances that these could penalties, result and in the they investment are therefore being payable classed from as taxable the pension property. fund. Scheme sanction charges levied on the scheme Administrator must be paid CIRCUMSTANCES from the pension fund. WHERE Neither AN IPS INCREASE nor the Trustees IN THE are VALUE liable. OF IPS INDIRECTLY will assess HELD an unquoted TAXABLE investment PROPERTY prior DOES to transaction NOT INCUR and A TAX it is CHARGE the responsibility of the pension scheme member(s) to inform IPS of any changes in circumstances If that the could value result of a in pension the investment scheme s being indirect classed holding as of taxable taxable property. increases without the pension scheme purchasing further shares in the company, this is not deemed as an unauthorised payment or taken into account for the purposes of the 10% CIRCUMSTANCES test for genuine WHERE commercial AN vehicles INCREASE (see above) IN THE unless VALUE it is OF part INDIRECTLY of a scheme or HELD arrangement TAXABLE to PROPERTY enable a lower DOES unauthorised NOT INCUR payment A TAX to CHARGE be charged. For If the example, value of if a pension scheme scheme s owns 8% of indirect the shareholding holding of taxable in a company, property and increases this is increased without the to pension 15% because scheme others purchasing decrease further their shares holdings, the this company, increase will this not is not be taken deemed into as account an unauthorised unless it is payment done as or a deliberate taken into device account to for avoid the the purposes unauthorised of the payments 10% test for charge. genuine commercial vehicles (see above) unless it is part of a scheme or arrangement to enable a lower unauthorised payment to be charged. Threshold BUYING THE SHARES For example, if a scheme owns 8% of the shareholding in a company, and this is The When increased maximum purchasing to 15% percentage the because shares, of others plan certain value decrease requirements in Unquoted their holdings, must Shares be fulfilled: this limited increase to 40% will not under be our taken company into account policy. unless it is done as a deliberate device to avoid the unauthorised payments 1. If the charge. shares are being purchased from or issued by a connected party (see below for a definition of connected parties), a professional valuation of the BUYING shares THE SHARES to be acquired by the pension scheme must be provided before the purchase proceeds. The valuation can be supplied by the company s auditor When purchasing or other suitably the shares, qualified certain person, requirements and must be must given be in fulfilled: writing. 1. The If member(s) In the addition, shares must The are being have Pensions purchased received advice Act 1995 from in lays or respect issued down by of the certain a connected purchase requirements party from (see a for regulated below Financial occupational for a definition Adviser. pension schemes of connected (i.e. parties), SSASs) a that professional Trustees must valuation fulfil of when the shares making to investments. be acquired by It is the our pension understanding scheme must that be the provided Trustees before of these 2. If the shares are being purchased from or issued by a connected party (see purchase schemes who proceeds. wish to The invest valuation in the shares can be of supplied an unquoted by the company company s must auditor below for a definition of connected parties), a professional valuation of the take or suitable other suitably professional qualified advice person, before and doing must be so. given Therefore, in writing. shares to be acquired by the pension scheme must be provided in addition before the to the purchase requirement proceeds. to obtain The valuation a professional can be valuation, supplied we by the will company s require a letter auditor from or the 2. In company's addition, accountant/auditor, The Pensions Act confirming 1995 lays that down in their certain opinion requirements the investment for other suitably qualified person, and must be given in writing. occupational is a suitable pension one for schemes the Trustees (i.e. that SSASs) will that not compromise Trustees must the fulfil Trustees' when If the making primary investment duty investments. of involves safeguarding buying It is shares scheme our understanding from funds. a third party that then we Trustees will need of third these party schemes validation who of wish the share to invest price. in This the shares requirement of an depends unquoted on company the investment must take so 3. please The suitable shares arrange professional must to give be registered us advice a telephone before in the call doing individual if you so. would names Therefore, like of further in pension addition information. scheme to the requirement trustees with to an obtain account a professional designation valuation, of the pension we will scheme s require name. a letter from the 3. In addition, company's The accountant/auditor, Pensions Act 1995 confirming lays down that in certain their opinion requirements the investment for occupational 4. It is is a a suitable pension requirement one for schemes that the you Trustees (i.e. SSASs) provide us that with will that a copy not Trustees compromise must fulfil of the share the certificate Trustees' when for making primary investments. our records. duty of safeguarding It is our understanding scheme funds. that the Trustees of these schemes who wish to invest in the shares of an unquoted company must take suitable professional 3. The shares advice must before registered doing so. in the Therefore, individual addition names of to the the pension requirement scheme to obtain trustees a professional with an account valuation, designation we will of require the pension a letter scheme s from the name. company s accountant/auditor, confirming that in their opinion the investment is a suitable one 4. It for is a the requirement Trustees that will you not provide compromise us with a the copy Trustees of the share primary certificate duty of for safeguarding our records. scheme funds. 4. The shares must be registered in the name(s) of the pension scheme trustee(s) with an account designation of the pension scheme s name. 5. If we are the sole trustee of the pension scheme, we must retain the original share certificate. If the pension scheme is a co-trustee product, the member trustee(s) would normally retain the original share certificate but it is a requirement that you provide us with a copy of the share certificate for our records.

10 PAYMENT OF DIVIDENDS If the shares do not yield an income, or increase in value, the Revenue may regard PAYMENT OF DIVIDENDS them as an unsuitable investment for the pension scheme. The company should If therefore shares pay do dividends. not yield an This income, can cause or increase problems, in value, especially HMRC if may there regard are external them as an shareholders unsuitable who investment have not for been the pension paid dividends scheme. in The the past. company should therefore pay dividends. This can cause problems, especially if there are external shareholders who have When not the been company paid dividends declares in a the dividend, past. it must pay its shareholders. To pay the dividend to the pension scheme, the company should draw a cheque for the net When amount the of company the dividend declares (i.e. a less dividend, 10% advanced it must pay Corporation its shareholders. Tax), To made pay the payable dividend to to the the trustees pension of scheme, the pension the company scheme, should and draw send a this cheque to us. for the The net tax amount cannot of the be dividend reclaimed (i.e. by the less pension 10% advanced scheme. Corporation Tax), made payable to the trustees of the pension scheme, and send this to us. The tax cannot be reclaimed by the pension scheme. VALUING THE SHARES VALUING THE SHARES It will be necessary from time to time to provide us with an up to date valuation of the We shares. need This to value is particularly pension scheme important assets at at the least point annually. of commencing This will mean or reviewing that the client retirement will need benefits. to arrange It is therefore an Accountant essential that to produce you provide an independent us with a valuation professional (at the valuation client s as cost). and when This is required. particularly important at the point of commencing or reviewing retirement benefits. It is therefore essential that you provide us with a professional valuation as and when required. SELLING THE SHARES SELLING Eventually, THE the SHARES shares will be sold at market value to provide retirement or death benefits. However, if there is sufficient income in the fund from other investments to Eventually, the shares will be sold at market value to provide retirement or death provide benefits, the shares could be retained in the fund for the next "generation". benefits. However, if there is sufficient income in the fund from other investments to provide benefits, the shares could be retained in the fund for the next generation. If If the shares are sold to a connected party, a professional valuation must be provided the shares are sold to a connected party, a professional valuation must be provided beforehand as evidence that the sale price is the open market value. beforehand as evidence that the sale price is the open market value. TRANSITIONAL PROTECTION Where, on A-Day (6th April 2006), a pensions SSAS already scheme held already shares held above shares the above simplified the simplified regime limits, regime it will limits, not be it will required not be to required reduce the to reduce holding the to comply holding with to comply the new with rules. the new Any rules. subsequent Any subsequent purchase or purchase enhancement or enhancement in value automatically in value automatically means the means whole the shareholding whole shareholding must comply must with comply the A Day with regulations. the current regulations. CONNECTED PARTIES HM Revenue & Customs have a broad definition of a connected party as set out in HM Revenue Customs have broad definition of connected party as set out in Section Section of of the the Income 1988 Taxes Taxes Act. Act This basically This basically involves involves the following: the following: A wife, husband or relative A wife or husband of a relative A trustee is connected with a settlor A business partner, wife, husband or relative of a business partner One company controlling another, or two companies being controlled by the same person (either with or without other connected persons) Any other member of the pension scheme

11 Any other person connected with such a member Any other pension scheme of which a member or connected person is also a member Any associated pension scheme. FEES Please The standard refer to fee the for relevant the work Charging involved Schedule with each for the investment associated in unquoted administration shares fees. is We 250 reserve (plus VAT the right where to applicable). charge an additional However, fee, if our on an guidelines hourly basis, are not in respect followed, of this any additional usually results work. in additional administration. We reserve the right to charge an extra fee, on an hourly basis, in respect of any additional work. It may be that we need to instruct an external solicitor to review documentation. The solicitor For those will who charge wish a to fee proceed for this with and this an investment will be paid in by unquoted your pension shares, scheme. the first We step will require is to complete your agreement and return to the the solicitor s Questionnaire costs before together proceeding. with the appropriate further documentation detailed in this document. For those who wish to proceed with an investment in unquoted shares, the first step is to complete and return the Unquoted Share Questionnaire together with the appropriate These guidelines are based on our understanding of current law and HM Revenue & Customs further practice, documentation which are subject detailed to alteration. in this document. These guides are based on our understanding of current law and HMRC practice, which are subject to alteration. If you have any queries then please do not hesitate to contact the Specialist Investment Support Team on James Hay Partnership is able to provide literature in alternative formats. The formats available are: Large Print (as recommended by RNIB), Braille, Audio Tape and PC Disk. If you would like to receive this document in an alternative format please contact us on For the hard of hearing and / or speech impaired, please use the Typetalk service via James Hay Partnership is the trading name of James Hay Insurance Company Limited (JHIC) (registered in Jersey number 77318); IPS Pensions Limited (IPS) (registered in England number ); James Hay Administration Company Limited (JHAC) (registered in England number ); James Hay Pension Trustees Limited (JHPT) (registered in England number ); James Hay Wrap Managers Limited (JHWM) (registered in England number ); James Hay Wrap Nominee Company Limited (JHWNC) (registered in England number ); PAL Trustees Limited (PAL) (registered in England number ); Santhouse Pensioneer Trustee Company Limited (SPTCL) (registered in England number ); Sarum Trustees Limited (SarumTL) (registered in England number ); Sealgrove Trustees Limited (STL) (registered in England number ); The IPS Partnership Plc (IPS Plc) (registered in England number ); Union Pension Trustees Limited (UPT) (registered in England number ) and Union Pensions Trustees (London) Limited (UPTL) (registered in England number ). JHIC has its registered office at 3rd Floor, 37 Esplanade, St Helier, Jersey, JE2 3QA. IPS, JHAC, JHPT, JHWM, JHWNC, SPTCL, SarumTL and IPS Plc have their registered office at Trinity House, Buckingway Business Park, Anderson Road, Swavesey, Cambs CB24 4UQ. PAL, STL, UPT and UPTL have their registered office at Dunn s House, St Paul s Road, Salisbury, SP2 7BF. JHIC is regulated by the Jersey Financial Services Commission and JHAC, JHWM, IPS and IPS Plc are authorised and regulated by the Financial Conduct Authority. The provision of Small Self Administered Schemes (SSAS) and trustee and/or administration services for SSAS are not regulated by the FCA. Therefore, IPS and IPS Plc are not regulated by the FCA in relation to these schemes or services.(01/14) JHPIPS 36 MAY16 GDF