Adding Family as Shareholders in a UK company – key considerations
Steve Tebbutt · Posted on: May 9th 2024 · read
Introducing family as shareholders can bring many benefits but requires a multifaceted analysis of tax implications that includes but is not limited to Income Tax, Capital Gains Tax, Inheritance Tax, Employment Related Securities issues, and the Settlements legislation.
Why add family as shareholders?
Firstly, it is worth briefly refreshing on why current owners of a company might consider adding their family as shareholders. The reasons could include:
- Succession. Current shareholders may be looking to step away and children may be becoming more involved in the business such that it is right to recognise/reward their involvement.
- Remuneration planning. Having family who are both employees/directors and shareholders can create great flexibility as salaries, pensions, and/or dividends can be paid.
- IHT planning. The potential to limit the value building in current owners’ estate. This might be attractive where the shares held by the current owners are expected to attract Inheritance Tax, for example, upon death. Adding the next generation can help build value in the hands of the next generation.
Of course, there are other potential reasons and objectives should be fully reviewed before deciding whether to add family as shareholders.
In some cases, having family as direct shareholders may not be appropriate. For example, where children are still minors. Introducing a trust as a shareholder might be a strategic move for company owners that can complement or replace direct family ownership. A trust can still facilitate effective succession planning, provide flexibility in distributing benefits, and offer potential tax advantages. They can also be used to bring in children whilst allowing owners to retain control. However, the establishment and management of a trust involve intricate legal and tax considerations, necessitating professional guidance to navigate the complexities.
Navigating the complexities of adding family members as shareholders in a UK company involves a nuanced understanding of tax implications.
Key tax considerations at implementation
As above, there are many tax issues to consider before adding family as shareholders. The key tax points to consider are:
- Inheritance Tax (IHT) In some cases shares held by existing owners will be valuable, and growing in value, and will thus add to any IHT exposure they face (usually on death). The value of shares held in a trading company or group may be sheltered by Business Property Relief (BPR). However, it is prudent to keep this under review as underlying activity and assets in the group changes over time. For an investment business, BPR will not usually be available. IHT may therefore be a driver in adding family shareholders, because shares can be created which pass value (and thus reduces IHT exposure) to family once provided to them. IHT charges and reporting issues can also arise when gifting shares to family or to trust – subject to the availability of BPR, other reliefs, and the availability of the nil rate band (currently £325,000) – and would need to be fully considered.
- Capital Gains Tax (CGT) A CGT exposure may also be building over time for current shareholders. Adding family as shareholders can help to limit that exposure; again, by utilising lower tax bands and allowances. Notably, family shareholders might qualify for Business Asset Disposal Relief (BADR, previously “Entrepreneurs’ Relief) which allows for up to £1m of lifetime gains (per person) to benefit from a 10% CGT rate on qualifying disposals (broadly, a disposal of shares in a trading company or group, in which a person has held more than 5% of the shares and are an employee or director for at least two years) and so future entitlement to BADR will be one of the many considerations. Shares given to family can create CGT charges (even where no consideration is given, because they will be deemed to take place at market value) but Holdover Relief may apply to allow the deferral of CGT when transferring shares in a trading company, or when transferring shares to trust. Careful consideration of Holdover Relief is therefore essential, although some shareholders may be content to realise CGT charges to lock in current CGT rates on gains to date.
- Income Tax Giving shares to family will not usually trigger immediate income tax charges. However, as indicated above, adding family members as shareholders presents an opportunity to optimise remuneration strategies. Leveraging the lower tax rates and unused allowances available to family members can enhance overall tax efficiency. Business owners should strategically structure remuneration packages to maximise benefits for both the business and family shareholders. Therefore, owners should carefully consider the rights attaching to shares provided to family ahead of implementation. The Settlements legislation should also be considered.
- Settlements legislation This exists to prevent an individual from gaining a tax advantage by arranging to divert his or her income to another person, such as to a lower earning spouse, partner, family member or friend, who is liable to a lower rate of tax or is not liable to income tax. This will need to be reviewed carefully as part of establishing share structure for families, particularly where minor children are involved or, where seeking to limit the rights attaching to shares, to limit the risk of it applying and defeating any income planning.
- Employment Related Securities (ERS) When directors or employees or their families acquire or dispose of shares, ERS issues may arise. This includes the potential for income tax and National Insurance Contributions (NIC) to arise on transfers or in future. In general, shares transferred to family may escape ERS charges due to the exemption for transfers in the normal course of the domestic, family, or personal relationships, but this will depend on the circumstances. It is therefore important to review the tax implications associated with share awards, options, or other forms of employment-related share schemes to ensure compliance with ERS regulations and manage any charges. It may also be prudent for individuals taking shares to enter into elections (known as “section 431 elections”) to help limit the risk of future income tax and NIC charges.
- Stamp Duty This tax applies when consideration is provided for shares, at a rate of 0.5%. Therefore, it would not usually be an issue if shares are gifted, the consideration does not exceed £1,000 or if new shares are issued. Consideration for shares will be one of several factors to think about before giving shares to family and so Stamp Duty implications should be reviewed and balanced with the other taxes outlined above.
The above is not an exhaustive list of all the considerations that need to be made and full advice should be sought on the tax issues associated reporting requirements.
Conclusion
Navigating the complexities of adding family members as shareholders in a UK company involves a nuanced understanding of tax implications. Owners must approach the process with meticulous planning and professional guidance.
There will be other considerations besides tax. For example, whilst family would only usually be given shares where they were fully trusted, it may still be prudent to enter a Shareholders’ Agreement to help protect against any changes in future circumstances (such as differing objectives between family members in future) or to enter a formal trust arrangement. Another example is that giving shares with a right to capital and income to children will impact future cash-flow for current shareholders. Accordingly, legal advice is recommended to ensure all issues are considered and that any transfers are completed effectively. Owners may also wish to liaise with a suitably qualified independent financial advisor to ensure any planning undertaken with regards to family ties up with their wider objectives and cash-flow requirements.
By taking a comprehensive approach, businesses can foster a seamless transition, ensuring both family harmony and tax efficiency in the generations to come.
Find Out More
To discuss any of the issues raised in this article, please contact the author Steven Tebbutt who will be happy to assist.
For questions on other personal tax matters, including trusts and estates, please contact our tax team.
Should you need assistance on any financial planning aspects, please contact our wealth management team.
