When gifting private company shares to your family members, there are several intricacies to consider.
Today, we will discuss the tax implications that come along with gifting company shares.
Explore the reliefs that can potentially apply to navigate this process effectively and save you money.
We will cover:
- The tax allowances when gifting shares to your family members.
- The methods www.taxexpert.co.uk can help you to utilise to save you on tax.
Overview of Gifting Company Shares
To make a gift of shares to a family member in your own company:
- Check the company’s articles and any Shareholder agreements to ensure that a transfer to a family member is permitted.
- In most cases, there will be no restriction on share transfers. Where there are third-party investors, or you have bespoke articles or a company share scheme, there may be restrictions. If a transfer is not permitted then you will need to consider whether you are able to change the articles/agreement and then make the gift, if possible.
- If there are any transfer provisions in the articles, ensure that you follow these, these may include giving notice to the other shareholders (if there are any).
- You might also like to put something into a short letter to the family member so that this provides evidence, should it be required later, of your intentions. 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 parties complete a stock transfer form.
- Complete the gift by handing back your share certificate to the company which will issue a new Certificate to the new shareholder, cancel yours and update the statutory books.
There are a few exemptions to the general structure of making a gift of shares to a family member, and we will explore them below:
- Income Tax: a gift of shares to a family member is not usually subject to Income Tax under the Employment-Related Securities rules, s.421B(3) ITEPA 2003 provides an exemption for gifts to friends and family.
- The Settlements’ anti-avoidance legislation will apply if shares are transferred to minor unmarried children and may apply to a gift of shares or dividends waived in favour of a spouse or civil partner.
- There is an exemption for spouses and civil partners. The rules do not apply provided that the shares are ordinary shares with full voting rights and the gift is not wholly a right to income. A dividend waiver is wholly a right to income.
Capital Gains Tax (CGT):
When gifting shares to family members, there can be CGT complexities to consider.
- Givers and recipients are connected for CGT purposes, and the transfer is deemed to be made at market value.
- Provided that the company is a trading company, and its shares qualify as Business assets for CGT, both parties can jointly make an election under s.165 TCGA 1992 to hold over the gain (if there is a gain) on disposal.
- The Holdover claim is restricted if there are any non-business assets on the company’s balance sheet.
- Valuation: HMRC provides a concession in SP 8/92 which ensures that if the gain is fully held over there is no requirement to formally value the shares. This is because the recipient merely receives the shares at the giver’s base cost. This is generally the nominal value if shares were acquired on incorporation.
- Making the holdover claim: use form HS295. Once you tick the box to apply SP 8/92 you need only supply estimates in your responses to the valuation/computation questions. The wording on the form is not terribly clear and you are required to put an ‘E’ for estimate next to any estimated figures.
- Small share percentages could be gifted annually to stay within the CGT annual exemption if holdover relief is not available, for example in a Family Investment Company. This would mean there would be regular transfers for IHT purposes though, see below.
Inheritance Tax (IHT):
Similarly, there can be intricacies of IHT to bear in mind when gifting shares to your family members.
- A shares gift is a Potentially Exempt Transfer (PET), so if the giver 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 a company is a trading company, it should qualify for 100% IHT Business Property Relief (BPR) so there may be no hurry to transfer shares to the next generation since as long as BPR continues to apply there will be no IHT on death, and the shares can benefit from the Capital Gains Tax-free 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 children IHT liabilities can be minimised.
- If the giver dies within seven years, if the shares qualify as business assets (the company qualifies, and the shares are unquoted, and the giver held the shares for two years) then BPR will apply on their death. If they die after three years taper relief will apply to reduce the Rate of IHT.
Stamp Duty Land Tax
When gifting shares to family members, it’s important to consider Stamp Duty Land Tax implications.
While this tax mainly applies to property, it could apply to shares linked with property ownership.
Shares unrelated to property are generally exempt but seeking professional advice for shares connected to property is advisable.
There are some extremely specific scenarios which SDLT can come into play, but contacting Tax Expert can ensure you aren’t caught out by any of these.
Summing up, when gifting shares of a private company to family, consider the tax nuances involved.
Delve into the tax implications and potential savings in this process.
For more guidance and assistance in optimising your shares gifting strategy, reach out to Tax Expert.
Allow us to navigate these complexities and opportunities for you.
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