Gifting shares to your family: An overview and procedure
Instead of creating a different share class you may prefer gifting shares to your family. Moreover this approach works well if they work alongside you in the business and you have a succession plan.
Overview and procedure involved
Usually there is no restriction on share transfers. Your company's articles should indicate a transfer to a family member is permitted . However, there might be restrictions where there are third-party investors, bespoke articles or a company share scheme,
Therefore if a transfer is not allowed consider changing your company's articles or shareholder agreement. Then make the gift, if possible.
Ensure you follow any transfer provisions in the articles, such as giving notice to other shareholders if relevant.
Additionally, you should formalise this transaction in a short letter to the relevant family member, For example, "Dear [name], I am making an outright gift of 500 ordinary A shares being 5% of my current shareholding in the company to you on [date]."
Finally both you (the donor) and the recipient (donee) need to complete a stock transfer form. Complete the gift by cancelling the existing share certificate and issuing new share certificates to you and the recipient.
Tax implications of gifting shares to your family
Income Tax
When gifting shares to a family member working in the business this transaction could be caught by HMRC's Employment Related Securities legislation.
Although, the gift of shares should not be chargeable to income tax due to an exemption.
However, HMRC's Settlement provisions apply if you gift shares to your children (under 18), or the shares have a right to income only. If these rules apply, any dividends paid after the gift will be taxable as your income.
Capital Gains Tax
For Capital Gains Tax purposes both you and your family member who is the recipient are treated as connected persons. As a result, this means that the transfer occurs at market value, regardless of any payment made for the shares.
If your company is a trading company and its shares qualify as business assets both parties can elect to hold over the capital gain. However, the holdover claim is restricted if there are non-business assets on the company's balance sheet.
HMRC agrees there is no need to formally value the shares where the capital gain is fully held over. This is because the recipient merely receives the shares at the giver’s base costm usually the nominal value, if acquired on incorporation.
Alternatively, you could give small share percentages annually to stay within the CGT annual exemption. This approach works if holdover relief is unavailable. For example where share transfers are made to a Family Investment Company.
Inheritance Tax
A gift is a Potentially Exempt Transfer (PET). Therefore if the donor survives for seven years after the gift there is no IHT. The value falls out of the giver's estate for IHT purposes.
If your company is a trading company it should qualify for Business Property Relief (BPR). Therefore as long as BPR applies there will be no IHT on death, plus the shares benefit from the capital gains uplift on death.
Involve children in your company as soon as they turn 18. Companies may change over time. As a result a trading company could become a property holding company that doesn't qualify for IHT relief. Regularly gifting shares to your family cab therefore minimise IHT liabilities.
Stamp Duty
There is no Stamp Duty on a gift of shares. However, if any consideration is given for the shares, consider Stamp Duty.
Summary
Gifting shares to your family involves practical steps and important tax implications. Therefore always seek professional advice as each person's circumstances differ. Gifting shares to your family can be an effective way to plan for the future and ensure a smooth business succession.
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