Gifting shares to your family
If you run a family business you may be thinking about gifting shares to your family. In this article we're going to provide an overview of the tax issues you need to consider.
Overview and procedure involved
Rather than create a different share class you may prefer gifting shares to your family, particularly if they work alongside you in the business and you have a succession plan.
Usually there is no restriction on share transfers and your company's articles should indicate a transfer to a family member is permitted . However where there are third-party investors, or you have bespoke articles or a company share scheme, there might be restrictions
If a transfer is not permitted then you will need to consider whether you are able to change your company's articles/shareholder agreement and then make the gift, if possible.
If there are any transfer provisions in the articles, ensure that you follow these correctly, particularly where these may include giving notice to the other shareholders (if relevant).
It would be a good idea to formalise this transaction in a short letter to the relevant family member so that this provides evidence of your intentions, should you be required to produce it at a later date. 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]."
Both the donor (you) and the donee (recipient) will need to complete a stock transfer form. You can then complete the gift by cancelling the existing share certificate and issuing new share certificates to you and the recipient.
What are the tax implications of gifting shares to your family?
Income Tax
Where company shares are gifted 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 to a family member should not be chargeable to income tax by virtue of this exemption here.
It should be mentioned that HMRC's Settlement provisions will take effect if your shares are gifted to your children (and they are under 18), or the shares carry a right to income only. Broadly speaking if these rules apply any dividends subsequently paid after the gift is made will be taxable as your income.
Capital Gains Tax
When gifting shares to your family, for Capital Gains Tax purposes both you as the donor and your family member who is the recipient will be treated as connected persons. Essentially this means that the transfer is deemed to take place at market value, regardless of the fact that no consideration has been paid for the shares.
Provided that your company is a trading company and its shares qualify as business assets both parties can jointly elect to hold over the capital gain (if there is a gain) on disposal. However, the holdover claim is restricted if there are any non-business assets on the company's balance sheet.
Additionally by concession HMRC will agree there is no requirement 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 cost. Usually this would be the nominal value if shares were acquired on incorporation.
Alternatively, small share percentages could be gifted annually to stay within the CGT annual exemption if holdover relief is not available, for example share transfers could be made to a Family Investment Company.
Inheritance Tax
A gift is a Potentially Exempt Transfer (PET) so if the donor survives for seven years following the gift there is no IHT as 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 continues to apply there will be no IHT on death, plus the shares can benefit from the capital gains uplift on death.
There may be occasions where it is advantageous to involve the children in your company as soon as they reach 18 years old. Also, a company may change over the years, and what starts out as a trading company could become a property holding company that does not qualify for IHT relief. In these cases, by making regular gifts of shares to your children IHT liabilities can be minimised.
Stamp Duty
There will be no Stamp Duty due as it is a gift of shares. However, if any consideration is given for the shares, Stamp Duty should be considered.
Summary
The above should be considered a guideline of the practical issues which are involved with a gift of shares and it is always advisable to seek advice as each person's circumstances are different.
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