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How to hold unquoted companies in your Sipp

Unquoted companies can deliver high growth but have higher risks and costs
How to hold unquoted companies in your Sipp
  • It is possible to invest Sipps in certain types of unquoted companies
  • It is important to ensure that what you invest in is a qualifying company or you could pay a high tax charge
  • Sipps which allow investment into this kind of asset tend to have higher charges 

Some self-invested personal pensions (Sipps) allow investments in a wider range of assets than funds and listed equities. These often include commercial property and, in a few cases, shares in unquoted companies. However, the latter is not a suitable investment for all investors, and the strict rules on holding unquoted companies in your Sipp without incurring a tax charge limit the ones you can potentially invest in.

Unquoted companies are typically at an earlier stage than listed companies so could deliver stronger growth. And if the value of such a holding grows and the pension disposes of it, it does not incur capital gains tax.

However, early-stage companies have a high failure rate and the value of your investment in one could fall to nothing or less than you invested. They are less easy to buy and sell than quoted companies, and could take some time to value, so it could take longer to realise money from them when you need to draw money from the pension than from listed equities or funds.

For these reasons, you should not invest in this kind of asset unless you have a high risk appetite and a Sipp with a large value, and you should not have a large proportion of your pensions in unquoted companies. “Unquoted shares may appeal to individuals who are financially comfortable and in a position where they can afford to take more of a risk with some of their pension savings,” says Jessica List, pension technical manager at Curtis Banks.


Strict rules

If you fall foul of the rules on holding unquoted companies in a Sipp you may incur a tax charge.

There are limits on how much of an unquoted company your Sipp can hold. “Generally, the individual and their connected parties (such as relatives) cannot hold more than 20 per cent of the share capital,” explains List.

Apart from some specific exceptions, if UK pension schemes invest directly or indirectly in taxable property they incur charges. If a pension scheme holds shares in an unquoted company that buys residential property or tangible, moveable assets costing more than £6,000, the pension scheme may be considered to have purchased those assets directly. Taxable property includes residential property and tangible, moveable property such as plant and machinery, cars, furniture and office equipment. This would result in the Sipp holder paying a charge of 40 per cent or, if more than 25 per cent of the Sipp's value is in the unauthorised investment, 55 per cent. The scheme administrator would pay a charge of 15 per cent. And a further charge of 40 per cent is levied on any income and or gains arising from the unquoted company each year.

This does not apply if the unquoted company meets all the following conditions. It is engaged in a trade, profession or vocation. It is not controlled by the Sipp holder, or people connected with them or the Sipp – individually or together. And the Sipp holder or a person connected with them is not a controlling director of the company or, if they are, the Sipp holder doesn't own more than 20 per cent of the company.

"Shares which are listed on Aim are treated as unquoted and some of these are very large companies with huge shareholder diversification," says Martin Tilley, director of Westbridge Pensions. "So it is possible that if the three criteria are met – in essence, the Sipp and the holder of it are not one of the parties able to illicit control – irrespective of the taxable moveable property held by the company, the share purchase would be acceptable and not taxable. But if the member is a director, or has any control themselves or with others, and the company has taxable, moveable property, the tax would apply."

Dentons Pensions says that a 'connected person' includes spouses, civil partners, children, grandchildren, parents, grandparents, siblings, relatives of the Sipp holder’s spouse or civil partner, and business partners. It could also include someone with whom you have made commercial or financial transactions, adds James Jones-Tinsley, chartered financial planner at Barnett Waddingham.

In most cases, you cannot invest in your own company or one that someone connected to you is involved with. "It is nearly impossible for a Sipp to invest in a family business as by definition, the Sipp and its holder are connected to parties that control the company," says Tilley. "If any taxable, moveable property above the £6,000 limit is held by the company, it is deemed to be indirectly held by the Sipp and tax charges would apply."

There is also the risk that the business you invest in or the amount that you and or connected parties own change so it becomes a taxable asset, meaning that it is important to review this on a regular basis.

Because this is a highly complex area you should get professional advice to ensure that the unquoted company you are thinking of holding qualifies as a pension investment and will not incur any tax charges.


Lack of providers

Few providers allow their Sipps to hold unquoted companies, so check whether your provider or the company you are thinking of opening a Sipp with does. Before a provider gives the go ahead for your Sipp to invest in unquoted companies it conducts extensive due diligence on them. It looks at things such as how long a company has been trading, whether it is financially sound, and whether it is controlled directly or indirectly by the Sipp holder or a person connected to them. Even if your proposed investment in the unquoted company meets government rules, the provider may have stricter requirements for their own Sipps and not approve the investment.

Sipps which allow investment in unquoted companies are more expensive than basic Sipps provided by investment platforms such as Hargreaves Lansdown, interactive investor and (see Picking a low-cost Sipp provider, IC 27.05.22).

For example, Curtis Banks charges a Sipp establishment fee of £220, an annual fee of £771 and if you do not have an adviser a further £107. Further charges may arise if you hold a specialist investment such as an unquoted company. It charges £552 for specialist investment due diligence and a specialist investment annual fee of £220 per investment.

Dentons' Sipp charges an establishment fee of £350 and a standard administration fee of £612 a year. It charges a fee of £500-£1,000 for making an investment in unquoted equites and £100 a year for holding non-standard assets.

The Embark Full Sipp charges an annual fee of £400, £525 for due diligence on non standard investments, and an initial holding fee of £825 and annual holding fee of £175 for UK unlisted equities.

Other providers which allow their Sipps to hold unquoted companies include XPS Self Invested Personal Pensions and Mattioli Woods.