Tax issues arising out of holding shares

Today, private individuals who hold shares in private trading companies (or the holding company of a trading group) have a number of tax issues to consider when they are thinking about holding the shares, either directly or through personal pension arrangements.  SIPPs (Self Invested Pension Plans) allow shares to be held through personal pension arrangements, but with them comes the  principal concern that holding shares indirectly through a SIPP means that they will not qualify for Entrepreneurs’ Relief on an eventual sale of the company.  This issue is also likely to come into focus if there is a time when the value of assets held within a SIPP reaches the lifetime limit (currently £1.25m).  Consequently, the balance between avoiding excessive charges and possibly obtaining the beneficial 10% rate of tax under Entrepreneurs’ Relief is thrown into focus.

In many cases this may lead to the need to reorganise share capital by reducing or completely eliminating the shareholding held through a SIPP and creating a personal direct shareholding, such that, if all the other conditions are satisfied, Entrepreneurs’ Relief may be available on an ultimate sale.  This type of reorganisation is not problem-free. A number of issues will have to be considered when agreeing the terms of the sale with the trustees of the SIPP, and in particular the value at which those shares must be acquired and any necessary funding to enable the purchase from the trustees to take place.  All-in-all, large benefits may be secured in certain scenarios but in many cases there will be an initial up-front cost to doing this.  Critically, efforts should be made to implement these arrangements before the shares have accrued or increased in value: this will invariably make undertaking the reorganisation a lot simpler.