Jennifer Adams considers the tax implications when a director or shareholder transfers shares to family members.
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The transfer of shares may be for various reasons – usually when the owner decides to retire, or at least reduce their involvement in the business. Alternatively, parents may wish their children to have some of the company’s shares to receive dividends, possibly to help fund further education. The transfer can be by gift or sale, or the company may issue new shares to the family members, reducing the percentage holding of the other shareholders.
Valuation of the gift
However, invariably the transfer will be a gift. The tax position will depend on who is receiving the shares. If to a spouse or civil partner, transfers of assets between married couples and civil partners can take place tax-free. For capital gains tax (CGT) purposes, the gift takes place at ‘no gain/no loss’ and is also an exempt transfer for inheritance tax (IHT) purposes. However, gifts of shares between family members outside marriage or civil partnerships are chargeable, the transferor being liable based on the open market value of the shares at the date of gift.
Determining the market value is not straightforward, as legislation states that it is a hypothetical purchaser buying the shares from a hypothetical vendor, both of whom are assumed to be willing to buy or sell, and determine what price is to be paid. It is generally accepted that there is no single correct way of valuing the shares of a private company, but by building an in-depth understanding of the company and the market in which it operates, a valuation expert can assist in arriving at a reasonable estimate.
Capital or income?
Gifting shares means no cash changes hands, and as such no cash will be available to pay any CGT due. However, a claim can be made to 'hold over' or defer the gain under 'gift relief' such that the donee will become liable when they finally sell the shares. On sale, there will be the usual restrictions that the shareholder must own at least 5% of the shares and voting rights in the company and the company’s main activities must be ‘trading', rather than 'investment' (e.g., dealing wholly or mainly in securities, stocks or shares, land or buildings, or making or holding investments, or is a holding company with trading subsidiaries).
Gifting (or transferring) shares within the owner's lifetime could fall within the 'settlements’ anti-avoidance rules (which prevent someone from taking tax advantages by diverting income to another). However, gifts to family members will not generally be caught, so long as the right to all dividend income is not restricted.
The gift may be subject to IHT should the donor die within seven years of the gift. If the estate's value (including the gifted shares) exceeds the IHT threshold, IHT may be payable. However, exemptions and reliefs are potentially available (e.g., the annual gift exemption and business property relief), which can reduce the liability.
Since no consideration is received for the shares, there will be no stamp duty implications.
Problems may arise if the family member receiving the shares is an employee of the company at the time of transfer. HMRC could argue that the shares would not have been given if the donee had not been employed and, as such, the gift should be charged as employment income under the ‘employment-related securities’ provisions, or possibly under the ‘disguised remuneration’ rules.
Practical tip
There may be borderline cases where the evidence is inconclusive. For those cases, a non-statutory clearance application to HMRC may be worth considering, setting out the facts and the reasons for the gifts of shares to the family. Where shares pass solely to those children involved in the business, HMRC will generally accept that the transfer was made in the normal course of the domestic, family or personal relationships of the person making the gift, and not as employment income.
