- Harsh interpretation of share valuation rules by HMRC can push personal pension funds over £1.5 m taxable limit
- Private companies and pensioners holding their shares urged to take specialist valuation advice now
- HMRC urged to clarify rules for personal pensions
Vantis, the AIM listed accountancy and business advisory firm, today warned consumers that holding private shares in their pensions may push their fund into the taxable bracket due to little known valuation rules operated by Her Majesty’s Revenue and Customs (HMRC).
Under rules taking effect on 6 April 2006, pension funds with assets under the threshold of £1.5 million will remain untaxed while funds valued above that threshold will be taxed on the excess at rates as high as 55% when the pensioner begins to receive the benefits. However, the method likely to be used by HMRC to value these private company shares differs dramatically from that used for most other tax purposes.
Many investors hold shares in private companies as part of their pension plans, through participation in the ownership of family companies, or by inheritance. Indeed, the new rules seem to encourage ownership of such shares in pension funds. Valuation of unquoted or private company shares has long been difficult and complicated, with artificial rules often producing bizarre results. HMRC has its own specialist share valuation department, known as Shares Valuation, to ensure that the values put forward by taxpayers for whatever fiscal purpose are fair both to them and to the Exchequer. In conjunction with the Audit & Pension Scheme Services they have previously taken the view that they are entitled to aggregate shares held in a pension fund with others outside it, if owned by the pension beneficiary or beneficiaries.
The value placed on the shares held in the fund is found by reference to the aggregate holding including those shares held outside it.
According to David Bowes, Head of Share Valuation Services at Vantis, “The main issue here is one of clarity for the pension holder. The value of shares for tax purposes is normally their market value in isolation but HMRC has yet to make a public announcement as to whether normal rules apply to pension funds. Many people place part of their holdings in their Pension funds but most people are unaware that under current HMRC practice, these shares will be aggregated with any that are held by the beneficiary outside that pension. With more emphasis put on helping individuals for their financial security, we urge HMRC to treat private company shares held in pension fund separately from those held outside.”
As the value of the shares in private companies increases with the size of holding in voting terms, aggregating them means that the perceived worth of the aggregated shares will be far higher than initially thought, in many cases pushing the fund value over the taxable threshold.”
“To highlight what this means, take the case of the shareholder who has a controlling holding, say 55%, who puts 20% into his pension fund, and therefore under the control of the fund Trustees. The 20% cannot even block a special resolution, gives the trustees little influence within the company, and would normally be valued at a low figure on its own. However, as part of a combined holding of 55%, which is the way that HMRC seem to wish to treat it, it becomes at least twice as valuable, and therefore artificially increases the value of the pension fund.
David Bowes continued: “There are some issues that do need to be clarified by HMRC. Now, however, this will have a direct impact upon the fund size and tax payable on the excess over £1.5 million. Indeed, whether or not the shares in the fund are valued as part of an aggregate holding could well determine whether or not that threshold is exceeded, and the importance of the valuation basis cannot therefore be over emphasised. What HMRC are ignoring is that the assets in the fund are intended to generate pension benefits, either by selling the shares, or through any dividends that are paid by the company. However, HMRC seem to wish to put values on them that could not be achieved on a sale, and that are not justified by the dividends paid. Consequently, the pensioner could be taxed on a fund value that cannot ever be realised. This can only make the pensions crisis even worse.”
Case Study
The shareholdings in Clerkenwell Widgets Ltd are as follows:
Mr Jones - 55% (Value £100 per share)
Mrs Jones - 26% (Value £40 per share)
Children of Mr & Mrs Jones - 10% (Value £25 per share)
Pension fund for Mr & Mrs Jones - 9% (Value £25 per share)
In reality the Jones family controls the company, but for tax purposes excluding IHT this is ignored. Therefore, were Mr Jones to transfer 10% of his shares, even to a connected person, the value would be that of a 10% holding in isolation, heavily discounted, and, on the above figures, carrying a value of £25 per share.
If the 9% Pension fund holding was valued in isolation, the value per share would be £25. However, as part of an aggregate holding of 100%, or even, ignoring the children’s shares, part of a 90% holding, the value per share of the 9% would be £100, or possibly more. Clearly, if pension fund shares are aggregated for valuation purposes with shares outside the fund, the value per share of those in the fund is likely to be higher. The threshold is thus more likely to be exceeded.