Example case study: Unlisted / private company share purchase

Please note this case study is not based on real life events and is intended to demonstrate how a SIPP can be used in a specific scenario.

Before such a transaction is entered into we would recommend that advice is taken from a suitably qualified Financial Planner.

Problem

As well as being a high net worth individual Bill Shakespeare is an experienced investor in small businesses and is always looking for the next investment opportunity.

He has found an exciting technology company that has developed an innovative new piece of hardware which they have applied to patent.

The business has advance orders and is looking for investment to fund volume production.

Bill is interested in investing in the company and speaks to his Financial Planner about the option of using his pension fund to invest.

Possible solution

Most of Bill’s capital is tied up in other investments; however he does have a Personal Pension Plan, which has not been reviewed for some years and he asks his adviser whether this could be used to purchase the shares.

Bill’s adviser explains that in theory this is possible if a SIPP is used and certain criteria are met.

His adviser explains to Bill that the main issue with investing in private companies is where there is an indirect investment in taxable property. The company will hold taxable property in the form of tangible moveable property such as machinery, computers, desks etc.

For the investment to proceed it is therefore crucial that the SIPP and/or any associated or connected parties cannot control the company. This is because if they controlled the company they could control the assets and the investment could be subject to tax as an unauthorised payment.

Bill tells his adviser that he only wants to buy a small 5% stake in the company and that he does not already own any shares in the business. The adviser goes a little further and asks Bill to confirm that none of his family members own shares, that he will have no involvement in running the business, and finally that the investment is not being made for him to have any personal use of the company’s assets.

Bill’s adviser takes a depth breath and explains to him that a SIPP will be treated as having invested in taxable property if it buys shares in a trading company:

• that’s controlled by the investment-regulated pension scheme and/or associated or connected parties; or
• which scheme members or connected parties are controlling directors of; or
• which a company that scheme members or connected parties are controlling directors of holds an interest in (either directly or indirectly); or
• which holds any individual item of tangible moveable property worth more than £6,000 or used personally by a scheme member or connected party

Bill confirms this is all true, on that basis the adviser confirms that the investment can proceed subject to an independent valuation of the shares and due diligence checks on the company.

Having established that the investment can proceed Bills’s adviser sets about researching the market to find the ideal SIPP for James’ needs. The adviser recommends a bespoke SIPP provider, who allows private or unlisted shares to be bought within the SIPP. He also explains how the SIPP provider will levy their charges and produces a comparison between these costs and James’ existing Personal Pension Plan.

Bill and his adviser also agree a fee for the advice being given and furthermore agree that this will be paid for from the SIPP.

Within a few weeks the existing Personal Pension Plan has been transferred to the SIPP, a valuation of the company has been carried out and the due diligence checks on the company have been carried out with satisfactory results. This allows the purchase of the shares to be completed with the company grateful for having the additional capital.

Summary

Bill, who is an experienced investor, has found a way to make an additional investment, when he might not otherwise have been able to, as his capital outside of his pension was tied up.

There are of course many advantages and disadvantages of this type of investment. Not least buying shares in a single company could be considered to be high risk, although if the investment works out and James sells his shares at a profit he will pay no tax on the gain as the shares are held by his pension.

Next steps

If you would like to learn more about buying private company shares in a SIPP then speak to our team of highly qualified and experienced Financial Planners on 0115 933 8433 or email info@investmentsense.co.uk