Is there a minimum age for a company shareholder in the UK?
To complete the company formation process, you need to appoint a shareholder, a director, and a person with significant control (PSC). But what is the minimum age requirement for these roles in a limited company? And can you transfer shares to your children?
Whether you’re a parent planning for your child’s future, involving them in the family business, or a young entrepreneur forming a company while still in school, let’s explore these questions in detail.
Minimum age for a shareholder and other appointments
While one person can simultaneously serve as a shareholder, director, PSC, and company secretary, each role may have different minimum age requirements.
Shareholder
In the UK, there is no legal minimum age for a shareholder in a limited company, unless specified by the company’s articles. Minors can own shares, though public companies (PLCs) often restrict this, allowing parents or grandparents to hold shares on a minor’s behalf as trustees or through an investment trust.
Director
An individual must be at least 16 years old to be appointed as a director of a UK limited company. Although the age of majority is 18, individuals aged 16 or 17 can still serve as directors.
People with Significant Control (PSC)
Just like shareholders, there is no statutory minimum age for being a person with significant control (PSC) in a UK company. Many shareholders are also PSCs due to their shareholdings, making the lack of an age restriction consistent across both roles.
However, PSCs hold significant influence and decision-making power, which may be problematic for minors who typically lack the necessary knowledge and experience. Additionally, minors may face legal limitations when entering into contracts on behalf of the company, as such contracts are often unenforceable against them.
Company Secretary (optional appointment)
To be a company secretary in the UK, you must be at least 16 years old. Like directors, company secretaries are officers of the company and handle statutory administration and business management.
Implications of Different Minimum Age Requirements
These differing age requirements mean that while a minor can own and control a company as a shareholder and PSC, they cannot manage the day-to-day operations as a director or secretary due to the minimum age restrictions for these roles.
- An Overview of Directors, Shareholders, PSCs, and Company Secretaries in the UK
- What does a company director do?
This may initially seem counterintuitive, and there are some potential downsides to consider. However, allowing children to be shareholders can offer financial benefits for both minors and their parents if managed properly.
Below, we outline the advantages and disadvantages to help you decide if issuing or transferring shares to your child is the right choice.
Advantages of appointing a child as a shareholder
If you run a limited company, there’s generally nothing stopping you from giving shares to your children, unless your company’s articles of association explicitly prohibit it. In such cases, you can amend the articles by passing a special resolution among the members.
Many family-owned businesses choose to issue or transfer shares to their children to provide them with dividend income or capital assets. This approach can offer several tax advantages and may allow you to:
- Introduce your child to investing, educate them about financial markets, and teach them money management skills.
- Finance their education and provide them with a regular income stream.
- Take advantage of their annual tax-free Personal Allowance (£12,570 for the 2024-25 tax year) and dividend allowance (£500) to reduce your household’s tax liability. However, this applies only if your child is at least 18 years old when dividends are paid.
- Plan ahead to provide your child with a tax-free source of dividend income when they turn 18.
- Gift shares gradually over several tax years to utilize your annual Capital Gains Tax allowance (£3,000 for the 2024-25 tax year). This strategy can also be beneficial if you plan to pass on your company to your child in the future.
- Reduce your Inheritance Tax liability by transferring shares up to a value of £3,000 annually, which falls under the gifting exemption. Transfers above this value may be subject to a 40% Inheritance Tax if you pass away within seven years of the transfer.
- Provide your child with shares that have the potential to appreciate in value over time.
Consider issuing different types of shares to minors
A common approach when giving shares to minors is to issue non-voting shares. This helps address the child’s lack of legal capacity to make binding business decisions and safeguards the company from any undue influence that a minor shareholder’s parents might exert over the business.
Additionally, you can create different classes of shares that offer varying dividend rates. This provides greater flexibility in how dividends are distributed to your child.
Disadvantages of appointing a child as a shareholder
While there are potential benefits to issuing or transferring shares to your children, it’s important to carefully consider several critical factors, particularly the various tax implications involved.
Parental settlements
Parental settlement rules come into play when a parent (the ‘settlor’) redirects income to their minor children, including step-children, in an attempt to reduce their own tax liability.
This anti-avoidance legislation stipulates that any gross income exceeding £100 per year, which your child receives from shares you’ve gifted, will be taxed as your own income. The £100 annual limit applies separately to each parent, per child.
These parental settlement rules can make tax-efficient planning for your minor child’s education and support more complex. However, once your child turns 18, these rules no longer apply.
At that point, any dividend income your adult child receives from the shares will be considered their own for tax purposes. If this is their only income, they can receive up to £13,070 per year tax-free, which includes their £12,570 Personal Allowance and £500 dividend allowance.
What about shares gifted from grandparents?
When implemented correctly, parental settlement rules do not apply if a grandparent gifts shares to a grandchild under 18.
However, if there are any covert arrangements, such as the parent transferring shares to the grandparent to then be given to the child, any dividend income received by the child will fall under the settlement provisions. In such cases, the income will be taxed as the parent’s income.
Capital Gains Tax (CGT)
Capital Gains Tax (CGT) is another crucial consideration when gifting shares to your child. Any shares you transfer to your child, regardless of their age, will be considered a disposal for CGT purposes.
To minimize your tax liability, it’s advisable to stay within your annual Capital Gains Tax allowance of £3,000. If you plan to transfer shares of higher value, consider spreading the transfer over several tax years. This strategy allows you to utilize multiple annual allowances.
To calculate the capital gain, determine the difference between the original purchase price of the shares and their market value at the time of transfer. You will be liable for CGT on any gain that exceeds your annual allowance.
Directors’ power to refuse a share transfer
In many companies, the articles of association grant directors the authority to refuse the registration of a share transfer. This provision is also included in the model articles for private companies limited by shares.
As a result, even if the articles do not specify a minimum age requirement for shareholders, the board of directors may choose not to approve a transfer of shares to a child.
Therefore, it’s important to consult with the directors before making any arrangements to gift shares to your child.
Impact on other shareholders or employees
An often-overlooked consequence of transferring shares to your children is the potential impact on other shareholders and employees.
Such a transfer might raise concerns or discontent among existing shareholders, leading to unnecessary tensions and disagreements.
If a shareholders’ agreement is in place, it may impose restrictions on share transfers, such as pre-emption rights. Another common restriction is the requirement that no shares can be transferred without the unanimous consent of all members.
Having minor shareholders in your company, particularly if the value of their shareholding is significant, may also make it more difficult to attract new investors.
For employees, especially key or senior staff members, giving shares to a minor could be demotivating. It can be disheartening for those who have contributed significantly to the business’s success to see shares allocated to minors without any effort on their part – especially if those employees do not hold any shares themselves.
Capacity to enter into contracts
In the UK, contracts made with a child are generally voidable by the minor and unenforceable against them. This means a child can cancel a contract at any time before turning 18 and for a reasonable period afterward, without needing to provide a reason.
However, there are exceptions to this rule, including beneficial contracts for services, apprenticeships, education, or ‘necessaries’ like food, clothing, accommodation, and medicine.
When it comes to giving shares to a minor, this legal position introduces risk and uncertainty. Since shares are not considered ‘necessaries,’ any contractual obligations the child has in connection with their shareholdings are unlikely to be binding.
As a result, the child could choose to relinquish such obligations, including paying for their shares or adhering to the terms of any shareholders’ agreement.
Additionally, some banks and service providers require the consent of all shareholders to enter into contracts. This could present challenges for a company with a child shareholder when trying to access services like opening a business bank account or securing a loan.
Other considerations when giving shares to a minor
Family dynamics can be complex, especially in a business context, so it’s important to carefully consider the decision to give shares to your children. This is a significant step, as it means they will gain control over part of the company.
If you transfer a large percentage of shareholdings to your child, consider the potential consequences if they disagree with a proposal and outvote you on a resolution. Or, if you later decide to reclaim more control of the business, what if they refuse to return their shares?
Moreover, if you have more than one child, sibling disagreements and rivalries could arise, particularly if an older sibling receives shares before a younger one. While this might seem unlikely, children don’t always have the maturity to handle such situations responsibly.
Possible alternatives
Before transferring shares to a minor, it’s wise to seek professional advice to determine the best approach for both you and your child. One option might be to create a new class of shares without voting rights, rather than transferring existing shares that come with voting rights.
Another alternative is to act as a nominee shareholder on behalf of your child, holding the shares in trust. This arrangement can help mitigate the risks and challenges associated with a minor’s inability to contract, while also addressing the concerns of other shareholders and potential investors.
In this setup, your child would retain the beneficial interest in the shares, while you would be registered as the legal owner in a nominee capacity. As the nominee, you would exercise voting rights, receive dividend payments, and sign contracts on behalf of your child. When they reach the age of majority, they could then assume full ownership of the shares.
Do you have any other questions?
So, in the UK, companies must appoint directors, shareholders, PSCs (Persons with Significant Control), and optionally, company secretaries. Directors handle the company’s management and decision-making. Shareholders own the company through shares and receive dividends. PSCs are individuals or entities with significant control, holding more than 25% of shares or voting rights. Although appointing a company secretary isn’t mandatory, they can support compliance and administrative duties.
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