Can shares be transferred to children?
Transferring company shares to minors can inspire an early interest in investments and financial markets. However, consider key factors such as tax implications and potential company restrictions. Assess possible taxes like inheritance or capital gains and review the company’s articles for any limitations on share transfers to minors. By addressing these considerations, you ensure a smooth and compliant transfer process.
Many public limited companies do not allow minors to hold shares, and private limited companies may include provisions in their articles of association that prevent individuals under 18 from being shareholders.
Many public limited companies prohibit child shareholders, and private limited companies often include a clause in their articles of association that restricts anyone under 18 from holding shares.
Some UK companies are cautious about having child shareholders because, in England, Wales, and Northern Ireland, minors are not legally capable of entering into contracts. This lack of legal capacity could exempt them from fulfilling shareholder responsibilities, potentially making it challenging for the company to secure new investments.
Anyone planning to transfer shares to their children should first review the company’s articles of association or shareholders’ agreement to identify any rules about minimum age limits for holding shares. This step ensures compliance with company regulations before proceeding with the transfer.
- In Scotland, the rules differ, as outlined by The Age of Legal Capacity (Scotland) Act 1991, which sets the legal age of capacity to enter into contracts at 16, with certain exceptions.
Reasons why people transfer to children
Shareholders might consider transferring shares to their children for various reasons, including:
- Estate planning: Individuals with substantial share portfolios may prefer to address inheritance matters by distributing their estate to their children and loved ones during their lifetime.
- Tax efficiency: For smaller investors, gifting shares to their children can help reduce the overall tax burden, although the impact may be minimal.
- Family continuity: In the case of a family-owned business, gradually transferring shares to children can help ensure the company remains family-run.
- Financial education: Parents who want their children to develop an interest in finance and investment may find that gifting shares sparks that interest.
Whatever your reason for transferring shares to your children, it is crucial to understand any potential issues and restrictions that could arise. Consulting an accountant or solicitor for independent advice is often advisable.
How do I transfer shares to my children?
The process for transferring shares to your children is essentially the same process as transferring shares to anyone else:
Complete a stock transfer form
The first step in transferring shares involves completing a stock transfer form, also known as Form J30. The information required on this form includes:
- Company Name: The name of the company in which the shares are held.
- Consideration Money: The amount being paid for the shares. If the shares are being transferred for free, this should be stated as “Nil.”
- Description of Security: This specifies the type of shares being transferred, particularly if there is more than one class of shares.
- Number of Shares: The exact number of shares being transferred.
- Current Shareholder Details: The name and address of the current shareholder (in this case, the parent), along with their signature.
- Recipient Details: The name and address of the person(s) receiving the shares (in this case, the child).
- Certificate 1: Complete this if the payment for shares is £1,000 or less, as no Stamp Duty is required. When gifting shares to children and indicating “Nil” in the ‘consideration money’ section, leave this part blank.
- Certificate 2: Use this for other situations where no Stamp Duty is due. If gifting shares to children and marking “Nil” in the ‘consideration money’ section, you can also leave this section empty.
Typically, the stock transfer form would be sent to HMRC for stamping if the consideration value exceeds £1,000, along with the payment for Stamp Duty. However, when a parent gifts shares to their child, this step is unnecessary, and no Stamp Duty is payable.
Company will check the transfer documents
The stock transfer form should be sent to the company along with the original share certificate. The company will review the form, and unless the articles of association include a restriction on transfers to minors, the share transfer should typically be accepted.
Approval of share transfers is generally straightforward, but if confirmation is needed via a board resolution, board minutes should be prepared accordingly. Within two months of receiving the stock transfer form, the company should issue new share certificates in the name of the child or children. The company will retain the stock transfer form and original share certificate(s).
The company’s register of members and register of transfers must be updated to reflect the changes. There is no obligation to notify Companies House of share transfers or new shareholders until the next confirmation statement is due.
Potential tax implications
Capital Gains Tax (CGT)
When transferring shares to children, it is considered a disposal for Capital Gains Tax (CGT) purposes, unlike transfers to a spouse, which are exempt from CGT.
To work out the CGT liability, you must determine the difference between the original purchase price of the shares and their market value at the time of transfer to your children.
If this amount exceeds the annual CGT allowance (£3,000 for the 2024/25 tax year), either on its own or combined with other CGT liabilities for the same year, a tax rate of 10% or 20% will apply, depending on your Income Tax band.
If you plan to transfer a large number of shares, you may want to spread the transfers over several years to utilize multiple CGT allowances and potentially reduce your tax liability.
Inheritance tax
When you transfer shares to your children, it is generally considered a gift for Inheritance Tax purposes. If the transferor (the parent) passes away within 7 years of making the transfer, the transferee (the child) may be liable for Inheritance Tax.
The amount of tax due will depend on the number of years that have passed between the gift and the parent’s death, calculated on a sliding scale known as taper relief:
- 40% if less than 3 years
- 32% for 3-4 years
- 24% for 4-5 years
- 16% for 5-6 years
- 8% for 6-7 years
- 0% if 7 years or more
You can give up to £3,000 in gifts each year without incurring Inheritance Tax, thanks to the ‘annual exemption.’ To minimize the tax burden when transferring shares to your children, consider gifting shares in yearly increments of up to £3,000. If you don’t use your entire exemption in one year, you can carry over the unused amount to the next year, but only once.
Keep in mind that if you transfer shares to your children at a price below the market value, HMRC typically views the difference between the sale price and the market value as a gift. This gift qualifies as a Potentially Exempt Transfer (PET) and falls under the standard Inheritance Tax rules.
Dividends
Dividends are generally distributed to shareholders as their share of the company’s profits.
Children under 18 can receive up to £100 in income from savings or shares tax-free. However, if their income exceeds this threshold, any additional amount is added to the parent’s income and taxed at the parent’s rate. As a result, the tax advantages of giving share dividends to minors are minimal beyond the £100 limit.
A more advantageous option is a Junior Individual Savings Account (JISA), which allows children to hold up to £9,000 (2024/25 limit) worth of shares tax-free. The limit is subject to annual changes. While children can take control of a JISA from the age of 16, they cannot withdraw funds until they turn 18.
Another, more complex option is for parents to create a trust for their children. In this arrangement, the parent (the ‘settlor’) invests shares into a trust, designating their children as the ‘beneficiaries.’ A trustee is appointed to manage the trust.
There are various types of trusts, but the most commonly used for managing assets for children is a ‘bare trust.’ Once the beneficiaries reach 18 (or 16 in Scotland), they can access and sell the shares held in the trust.
Do you have any other questions?
So, transferring shares to children in the UK is possible, but it requires careful planning due to legal and tax considerations. Many parents do this to pass on wealth or plan their estate, but they must be aware of Capital Gains Tax (CGT) and inheritance tax implications. Moreover, it’s essential to properly document the transfer to stay compliant with HMRC regulations and avoid complications.
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