We look at the rules for transfers of employee-owned shares into SIPPs.
Since A Day (now nearly a year ago) it has been possible for participants in SIPs and Sharesave plans to transfer shares into a SIPP and for the transfer to be treated as a contribution allowing the employee to benefit from double tax relief. It sounds a good idea but is it?
SIPs to SIPPs
What's the benefit?
Share incentive plans ("SIPs") are a tax approved all employee plan which allow participants to acquire "partnership" shares out of pre-tax salary of up to £1,500 per year, the employer can provide matching shares in any ratio up to 2:1 or free shares with a value of up to £3,000 per year. The shares come out of the SIP tax free after 5 years or can be retained in the SIP (which continues to shelter capital gains).
Since A day, SIP participants have been able to transfer their SIP shares into a self invested personal pension plan ("SIPP") for a period of 90 days after the fifth anniversary of acquiring their shares in the SIP. The shares are valued on the transfer and that value is treated as a contribution to the SIPP on which they can claim tax relief.
Suppose a participant buys £1,500 of partnership shares in his SIP and transfers them to his SIPP 5 years later when they are still worth £1,500. The government pays 22p for every 78p invested in a SIPP, taking it to a total contribution to £1. So £1,500 is immediately boosted to £1,923. Higher rate taxpayers get a further 18p through their tax return, or £346 in this case. So by combining the benefits of a SIP with a SIPP an initial contribution costing £885 is turned into £2,269 - a 156% uplift.
If the employer gave the employee two matching shares for every partnership share purchased and the share price increases by (say) 7% per year, a higher rate taxpayer who makes an initial investment of £1,500 out of pre-tax salary (equivalent to £885 out of net salary) would see his return boosted to an incredible £9,548.
What's the catch?
The employee has to open a SIPP if he doesn't already have one into which the shares can be transferred and he has to bear the fees himself (in contrast to employer provided pension plans). Employees should expect to pay administration fees of at least £75 per year plus dealing costs for each share trade.
The transfer of shares into the SIPP is free of dealing costs (but these will be incurred later when his SIPP trustee eventually sells the shares).
As an alternative, the employee could sell the SIP shares in the market CGT free and contribute the proceeds into any approved pension plan without having to take out a SIPP.
In practice the real benefit of being able to transfer shares direct from a SIP to a SIPP should be where there is no market for the shares. It would, for example, be attractive for employees of private companies to be able to transfer their shares direct to a SIPP instead of trying to find a buyer for the shares and using the proceeds to fund pension contributions. Unfortunately complex anti-avoidance rules make it almost impossible for SIPP trustees to hold shares in many family companies.
The avoidance rules (in Sch 21 FA 2006) were introduced as a result of a Government panic to prevent SIPPs being able to invest in residential property and other asset classes (such as fine wines). SIPPs cannot hold these assets directly or via a company. There is supposed to be an exemption to allow SIPPs to hold shares in trading companies but it is drawn too narrowly. Where a director (or persons connected him) hold more than 20% of a trading company it is still caught if it holds "tangible moveable property" of any sort (such as cars, computers, desks etc). The director cannot then hold these shares in his SIPP. It was pointed out at the time that the regulations effectively prevent SIPPs holding shares in many family companies but it seems this was the Governments intention.
Sharesave to SIPPs
Sharesave plans are tax approved option plans which allow participants to save up to £250 per month. The savings pay interest tax free and can be used to fund the price payable on the exercise of options 3, 5 or 7 years after grant. The exercise itself is free of income tax but any gains in exceeds of the exercise price paid for the shares are subject to capital gains tax.
Participants can transfer shares from sharesave plans to SIPPs within 90 days of the exercise of the option but the transfer is subject to capital gains tax (in contrast to transfers direct from SIPs to SIPPs). In practice this is unlikely to be a problem if the gain thereby triggered is within the participants’ annual exemption. The bigger problem is that most sharesave participants don't have SIPPs and would not want to incur the cost of establishing one when they could achieve the same double tax relief by selling their shares in the market and contributing the proceeds to an approved pension plan.
Transfers to ISAs
It is also possible for participants to transfer shares from SIPs and sharesave plans to ISAs within the same 90 day period. Transfers are CGT free for both SIP and sharesave participants.
The catch, of course, is that while investors are free to withdraw cash from their ISAs at any time (in contrast to the restrictive rules for pension arrangements) there is no tax relief on contributions into an ISA.
SIP participants can simply hold their shares in a SIP after the 5 year holding period has expired and gains continue to roll-up CGT free thereby achieving the same tax benefit of an ISA without the cost of establishing one. In contrast to ISAs, however, shares invested in SIPs cannot be diversified.
The ability to transfer shares from SIPs and sharesave plans to SIPPs was trumpeted as a major benefit when this was first permitted last year. In practice, most participants in these plans do not have SIPPs and do not want to incur the cost of running one just so they can transfer shares into them. Nor do they need to when the cheaper and easier alternative is to sell the shares in the market and contribute cash to an approved pension plan without taking out a SIPP.
It would be helpful, however, if employees could transfer illiquid shares direct into SIPPs but in many cases they cannot due to anti-avoidance rules. HMRC should re-visit the issue and (hopefully) allow all employees who hold illiquid shares in genuine trading companies to transfer these direct to SIPPs.
If you would like further information on this issue, please contact Guy Abbiss, Tracey Horne or Colin Kendon.