Are you a private company owner? Our guide will help you understand the tax implications of transferring shares to family members.
We’ll explain the taxes you might need to pay, and talk about any tax breaks you could get.
(6-minute read)
We will cover:
- The tax implications of transferring shares to family members
- How these apply particularly to CGT and IHT
The Basics of Transferring Shares to Family
In the UK, the tax rules provide an avenue for company owners to transfer shares to their relatives.
If you make family members shareholders in your company, you can share the profits with them.
This can also help you use up the £1,000 Dividend Allowance and any unused Personal Allowances or lower tax rates.
Depending on the specific needs of each family member, you may assign different share classes.
This method lets you distribute varying levels of dividends according to each share class.
Recent Changes to the Dividend Allowance
The Finance Act 2023 introduced significant changes to the Dividend Allowance.
Starting from April 2023, the Dividend Allowance decreased from £2,000 to £1,000.
From April 2024, the allowance will further reduce to £500.
The Dividend Tax Rates have also been revised, with rates as of May 2023 being 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate).
Steps to Transferring Your Company Shares
When planning to gift shares of your own company, you should:
1. Check your company’s rules and any agreements with shareholders to see if you can give shares to a family member. If you can’t, think about how you might change the rules or agreements to allow it.
2. If your company’s rules have any instructions about transferring shares, make sure to follow them.This could include letting other shareholders know.
3. Think about writing a short letter to the family member you’re giving shares to, explaining your intention to gift the shares.You could need this letter later as proof.
4. Both parties need to complete a stock transfer form.
5. Finish giving the gift by giving your share certificate back to the company.
The company will then give a new certificate to the new shareholder, get rid of your old certificate, and make changes in their records.
Tax Implications
Here are some essential tax implications to keep in mind when gifting shares:
- Income Tax: Generally, when you give shares to a family member you don’t need to pay Income Tax. This is because the rules say gifts to family and friends are exempt.
- Settlements’ Anti-Avoidance Legislation: This law may apply if you give shares to children who aren’t married or give up shares or dividends for your spouse or civil partner. But, if your spouse or civil partner gets ordinary shares with full voting rights, this law may not apply.
- Capital Gains Tax (CGT): For CGT, the gift is seen as being sold at its real price. If the company and the shares qualify, both sides can choose to delay the gain.
- Inheritance Tax (IHT): When you give shares as a gift, it’s usually seen as a Potentially Exempt Transfer (PET). If you’re alive for seven years after the gift, you won’t have to pay IHT.
- Stamp Duty: Because it’s a gift, you won’t have to pay Stamp Duty. But if you get something back for the shares, you might need to pay this tax.
Capital Gains Tax (CGT)
Let’s dive deeper into the Capital Gains Tax implications of transferring shares to family members.
When you give shares as a gift, you are liable to pay tax.
This might seem odd – why would you need to pay tax to HMRC when you’re giving shares away for free or selling them below their real price?
One might wonder why the tax responsibility falls on the person gifting the shares rather than the recipient.
Here’s why:
➢ Suppose you own shares that have increased in value over time.
➢ You might perceive that you haven’t ‘profited’ from them since you didn’t sell them.
➢ However, it’s this increase in value that triggers a Capital Gains Tax (CGT) obligation when you gift the shares.
➢ According to HMRC’s perspective, you’ve realised a profit on those shares, and this profit is yet to be taxed.
➢ The person who receives the shares will be liable to pay tax but later on – when they later transfer or sell the shares.
CGT for Transferring Shares to Family
If you give shares to your spouse, you don’t have to pay Capital Gains Tax.
But if you give them to your children, it’s seen as if you sold them, and you might have to pay this tax.
If you’re not giving shares to your spouse or a charity, but instead you’re selling or giving them to someone else, you’ll likely have to pay Capital Gains Tax.
This means that you could be handed a tax bill for passing the shares on.
You’ll have to figure out if the shares gained value from when you bought them to when you give them to your children.
If this gain is more than your yearly tax-free limit of £6,000 or if you’ve already used up this limit this tax year, you’ll need to pay tax.
This tax will be either 10% or 20%, based on how much you earn.
If you’re giving a lot of shares that have gained a lot in value, you might have a big tax bill.
To reduce this, you could spread out the giving of the shares over a few years to use the tax-free limit in each year.
Inheritance Tax (IHT)
Usually, while transferring shares to your children, these are treated as gifts for Inheritance Tax purposes.
If the person giving the shares (the parent) passes away within seven years after the gift, the person getting the shares (the child) will have to pay the Inheritance Tax.
The amount of tax due will be determined by the number of years between the date of the gift and the date of death.
Inheritance Tax decreases over time with a system called taper relief.
If the giver passes away less than three years after the gift, the tax is 40%.
For three to four years, it’s 32%, for four to five years it’s 24%, for five to six years it’s 15%, and for six to seven years it’s 8%.
If you give shares to your children for a price lower than their real value, the difference between the sale price and the real value is usually seen as a gift by the tax authorities.
This type of gift is referred to as a Potentially Exempt Transfer (PET) and will be subject to the standard IHT rules.
We hope this article helped you understand the steps and implications in gifting shares to family members.
If you’re looking for further help for your business, we can provide seamless and tax-efficient strategies that benefit both you and your loved ones.
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