Frequently Asked Business Question:
My wife and I own all the shares in our family trading company and would like to transfer shares to family members. My eldest son has been working in the business for 10 years and I would like to give him at least 20% of the business. My son isn’t able to pay for the shares. My wife and I would like to gift my son these shares. What are the tax implications of doing this?
There are various taxes that need to be considered on a gift of shares to your sons, such as income tax, capital gains tax, inheritance tax, and stamp duty.
If an employee of a company receives “free” shares, for example, if you make a gift of shares to your son who works in the family business, an income tax charge could arise on the market value of the shares gifted. However, if it can be demonstrated that the transfer of shares is for reasons of family or personal relations, the income tax charge may not apply.
A gift of shares from you or your wife to your son is also a deemed 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. The problem in the case of a gift is 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 may discourage family members from making gifts as part of any family tax planning mitigation exercise.
Therefore, capital gains tax is 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. Gift relief is designed to alleviate this problem; it permits the capital gain (and thus any tax liability) which is deemed to arise to be postponed. It does this by effectively transferring the capital gain to the recipient of the gift. To claim gift relief the appropriate submissions must be made to HMRC.
Stamp duty is also normally payable on the issue or sale of shares and it 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 purposes, a gift of shares from you to your son would constitute what is known as a lifetime transfer. Based on the 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 your son. In the event of your death within 7 years of the gift, an inheritance tax relief called Business Property Relief may also 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.
For more information and/or assistance, please do not hesitate to contact me at the email address below or phone our Tax Team
The advice in this column is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.