In most small family trading companies it is not unusual for the husband and wife to own all the shares. Where a family member works in the business they may wish to give them shares in the company as recognition for their input and hard work.
However, giving shares isn’t as easy as it sounds. There are various taxes that need to be considered on a gift of shares to a family member, including income tax, capital gains tax, inheritance tax and stamp duty.
If an employee of a company receives “free” shares, for example, or if you make a gift of shares to a family member who works in the business, an income tax charge could arise on the market value of the shares gifted. If, however, it can be demonstrated that the transfer of shares is for reasons of family or personal relations, the income tax charge may be avoided.
A gift of shares to a family member is also a deemed to be a disposal of shares for capital gains tax purposes. As the gift is being made to a connected party, it is a deemed disposal at market value. In the case of a gifts it is typical that the person making the disposal receives no monies out of which to pay any capital gains tax which may arise (the gift is treated as a sale at market value). This could discourage family members from making gifts as part of any family tax planning mitigation exercise.
Therefore, capital gains tax is potentially payable on any gain arising even though no consideration is paid. However, providing certain conditions are met, it may be possible to reduce the capital gain on the shares gifted to Nil by way of gift relief. This allows the capital gain (and thus any tax liability) which is deemed to arise on gift of the shares at market value to be postponed. It does this by effectively transferring the capital gain to the recipient of the gift. To claim this relief appropriate submissions must be made to HMRC at the right time.
Stamp duty is also normally payable on the issue or sale of shares and is payable by the person receiving or acquiring the shares. However, if the shares are gifted and no consideration is paid, a stamp duty gift exemption relief can be claimed which is likely to reduce the stamp duty costs to nil.
For inheritance tax (IHT) purposes, a gift of shares to a family member would constitute what is known as a lifetime transfer. Based on current legislation, if you survive 7 years from the date of the gift, there should be no inheritance tax consequences on the transfer of shares to the family member. In the event of your death within 7 years of the gift, IHT relief may be available on the transfer providing certain conditions are met. This could also reduce any potential exposure to inheritance tax to Nil.
Before any transfer of shares takes place, we would recommend that you seek professional advice to ensure that the available reliefs are applicable to your particular circumstances and also to ensure that the various conditions for each tax relief are fulfilled.
The advice above is a general guide only and does not constitute advice. You must seek professional advice before taking any action.
For more information please contact us on 0114 275 6292 or firstname.lastname@example.org.