How To Finance Your Business Growth With A SIPP

How To Finance Your Business Growth With A SIPP
Underwater by Andy Deitsch. Why?

Your SIPP or SSAS can not only purchase the ordinary shares of your business to finance its growth, your pension can also purchase cumulative redeemable preference shares issued by your company for the same reason.

Financing Your Business Growth By Purchasing Cumulative Redeemable Preference Shares Of Your Business With Money In Your SIPP Or SSAS Can Be Profitable For Both Your Business And Your Pension

What Is A Cumulative Redeemable Preference Share?

A cumulative redeemable preference share differs from a traditional ordinary share in that it usually carries no voting rights, and it doesn’t participate in any increase or decrease in the value of the business. 

It carries a fixed rate of dividend (or coupon). 


It’s ‘cumulative’ in that any unpaid dividend from one year is carried over to the next year. 


It’s issued for a specified period of time, typically five years, after which it must be ‘redeemed’.


The dividend attaching to a cumulative redeemable preference share would usually take 'preference' over the dividend payment of any other share class. 

In addition, in a company wind-up scenario, a cumulative redeemable preference shareholder would normally take preference over an ordinary shareholder regarding capital disposal, ranking ahead of ordinary shareholders but behind creditors.

Share Purchase By A SIPP Or SSAS

Cumulative redeemable preference shares can be acquired by both a SIPP and a SSAS. 

It’s a means of raising capital for funding a business.  It can be a useful option where there is no opportunity to raise a loan through a SSAS, perhaps because there is insufficient first charge loan security. 

Cumulative redeemable preference shares can be created for both existing and new limited companies.  They can be issued by both trading companies and investment companies.

This form of business funding fits in well with franchise acquisition, particularly where a proven franchise operation exists.

A SIPP or SSAS can potentially buy all the ordinary shares of the company.  However, the share purchase would be limited to 49 per cent, as the trustees would not normally want to take responsibility for the control of the business.

The full value of the SIPP or SSAS could potentially be used to purchase cumulative preference shares.  However, a limit of 65 per cent of the net asset value of the pension is generally imposed, to protect the pension holder’s retirement prospects in the event of the failure of the business.

The typical coupon rate of a cumulative redeemable preference share is 15 per cent.  It reflects the high, unsecured risk of this sort of investment.

Dividends are paid at the end of each accounting year, from the profit of the business.  They take preference over dividends payable in respect of the ordinary shares.

Should the business not make profit, the dividend is rolled over to the following year or years, reflecting the cumulative nature of the shares.

At the end of the term, the shares are redeemed and the capital value is repaid to the SIPP or SSAS.  If capital repayment isn’t possible, the arrangement can be extended into a new term.

The Role Of The SIPP Or SSAS Operator

Prior to their issue, as part of its due diligence, the SIPP or SSAS operator would need to understand in detail how the funds will be used within the business.  This will require the directors to submit a full business plan, financial forecasts and projections, CVs of the directors including any relevant experience relating to the way in which the money will be deployed within the business.

Each year, the SIPP or SSAS operator would need to review the business accounts.  It would also require a statement of assets of the business, to ensure compliance with HMRC pension guidelines, to avoid penal tax charges and penalties. 

This form of planning can usually only be put in place once the company and directors have sought full independent financial advice.  By its very nature, investment in the shares of small, unlisted companies is high risk, and it’s important that the directors are aware of all of the risks associated with such planning.

The risks are various.  This includes the inability of the company to repay the SIPP or SSAS the dividend payments and the initial capital investment.  And of course, should the business fail, it could have a serious impact on the SIPP or SSAS holder’s retirement plans if a large sum of money is lost.

As with any investment in equities, the pension administrator needs to ensure the SIPP or SSAS does not inadvertently undertake an indirect investment in ‘tangible movement property’ and/or residential property.

‘Tangible moveable property' is defined as 'things that you can touch and move'.  HMRC includes within this examples such as art, antiques and fine wine.  It can also cover business items such as company cars, computers, delivery vehicles, machinery and stock. 

Where the SIPP or SSAS member has a shareholding in the company that’s greater than 20 per cent, HMRC rules state that the target company cannot own any individual asset that has a value in excess of £6,000 nor owns, either directly or indirectly, any residential property. 

Where there is no connection with the SIPP or SSAS member, or the member holds a shareholding of less than 20 per cent, this rule doesn’t apply.

Companies that own residential property or acquire residential property for development are unlikely to qualify for this planning, as this will clearly be an indirect investment in residential property by the SIPP or SSAS.

A Cumulative Redeemable Preference Share Example

ABC Ltd wants to raise £60,000. 

In the short term, part of the money will be used to recruit staff and to cover cashflow pressures during the growth phase.  The remainder will be used to repay a director’s loan, enabling the director to clear some expensive personal debt. 

In the medium to long term, the SIPP will be used more actively to benefit the future value of the business and for the director’s retirement.  This will include the removal of the director’s guarantees and charges over personal and business assets, and to provide an on-going funding facility for ABC Ltd.

Here’s the process:

  • A SIPP is established and £160,000 is transferred from another pension scheme into the SIPP Bank Account.
  • ABC Ltd issues £60,000 of cumulative redeemable preference shares.
  • The shares are redeemable over a five year term and they carry a coupon rate of 15 per cent.
  • A valuation and appraisal of the proposal will be required by an independent accountant to satisfy HMRC requirements.
  • The SIPP purchases the cumulative redeemable preference shares, injecting £60,000 into ABC Ltd, which can be used for working capital at the director’s discretion.
  • ABC Ltd sets aside 15 per cent of £60,000 (£750 per month) to cover the dividend payments.
  • Once ABC Ltd has distributable profits, the monies are paid to the SIPP.
  • The SIPP can reinvest the income in other investments, it can be used to refinance ABC Ltd at a later date, or it can be drawn as benefits (subject to the pension holder being at least age 55).

Other Methods Of Pension-Led Funding

We have a whole section which features other types of pension-led funding.

Some Important Notes About Unlisted Shares

Cumulative redeemable preference shares are privately owned unlisted shares that are not quoted on a recognised stock exchange.  HMRC has strict rules surrounding the purchase of unlisted shares by SIPP and SSAS. 

The following factors have to be considered and met for an unlisted share purchase to be acceptable:

  • The assets of the company must be examined in detail to assess whether any of the assets are classed as 'tangible moveable property' by HMRC.
  • If an asset meets the definition of 'tangible moveable property', it must then be assessed to see whether it is 'taxable property' as defined by the definition below.

All four of the following conditions must be met to ensure that an asset is not treated as 'taxable property':

  1. The market value of an individual asset must not be greater than £6,000.
  2. The interest in the asset must be held indirectly by the SIPP of SSAS.
  3. The asset must be held solely for the purposes of the administration or management of the company that holds it directly.
  4. Neither the SIPP or SSAS member, nor anyone connected to the SIPP or SSAS member can personally occupy or have use of the asset.

The investment also needs to be commercial to ensure HMRC views the transaction as acceptable.  For example, if the shares do not yield an income, or increase in value, HMRC may regard them as an unsuitable investment for the pension scheme and penal tax charges could be imposed on the individual and the SIPP or SSAS. 

A SSAS is limited to being able to use 5 per cent of its total scheme value to purchase shares of a sponsoring employer, which tends to make a SIPP a more viable option in many situations.

Discover Whether Cumulative Redeemable Preference Shares Are Right For Your Business And Your Pension

If you'd like to be introduced to a SIPP or SSAS operator to discuss your requirements in detail, please get in touch with us using our contact form.

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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets

That's our opinion.  Not just because AJ Bell was the first company to offer an online SIPP.  Nor that it's received many prestigious awards.  And not even because the wife of SIPPclub's Founder has an AJ Bell SIPP.  It's because it's one of the most competitive stockmarket SIPPs on the market. 

Over time, charges can wipe out a huge part of your fund.  We like AJ Bell because there are no set-up costs.  If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund.  And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).  However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.

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