Transferring shares to your children is a fairly common practice. One that’s almost as old as the origin of companies limited by shares. Whether you intend to transfer shares to maintain family ownership in a business or you intend to help set your children up financially, shares are the way to go. A fair understanding of what this process entails is important in making rational decisions, hence the purpose of this article. This article will help you understand:
Why Transfer Shares To Children?
The Legal Process For Transferring Shares
Tax Implications Of Transferring Shares
Trust And Legal Structures
Potential Challenges And Risks
FAQS
Why Transfer Shares To Children?
Transferring shares to your children is a strategic move offering several benefits. This section explores the key reasons behind transferring shares to children:
Estate planning
Transferring shares to your children directly can help reduce or eliminate the inheritance tax on such shares after your demise. It could be classified as a business relief, which allows certain types of inheritance to be passed along without any inheritance tax. You could also transfer such shares into a trust to shield it from inheritance tax.
Gifting shares
Gifting your children your shares and other investments can also help set them up financially. No one wants their kids to suffer or be burdened with a boatload of taxes after their demise. Gifting assets to your offspring can help avoid that situation. You could also gift your children and grandchildren to help support their education, start a business, or learn how to manage money properly.
Succession
Transferring your shares is an ingenious way to ensure continuity or succession in a family business. If you’re the majority owner of a company, you may want to ensure that the ownership of your company remains within your family. However, if you’re transferring shares in family business, you must address this early, as a well-crafted plan can help ensure a smooth transition for future generations.
The Legal Process For Transferring Shares
Transferring shares is straightforward but involves a few important steps to ensure proper completion. This section will explain the types of shares, what to check in a shareholder agreement, the paperwork you’ll need, and how to get the transfer approved and registered.
Type of shares
To understand the legal process of transferring shares, it’s essential to understand the different types. These include:
Ordinary shares: These are the most common class of shares. They do not award their holders any special rights or restrictions. However, their holders have the right to vote in company meetings.
Preferential shares: This category of shares is superior to the ordinary shares. Its holders are eligible to enjoy company dividends before the holders of any other type of shares. However, their voting right is not guaranteed.
Convertible Shares: This category of shares can be converted into other securities, such as common stock or bonds, under certain conditions.
Redeemable Shares: Shares that the company can repurchase at a predetermined price at a specified time.
The type of shares being transferred can affect the process, as certain shares may have more restrictions or conditions attached to their transfer, which must be carefully considered.
Shareholder Agreement Considerations
To transfer your shares, you must ensure that you stay within the confines of the company policies guiding such transfer. Such policies are usually embedded in the Company’s Article of Association. For example, certain companies have age restrictions of 18 years on their shareholders, while others do not. This provision prohibits shareholding by underage children because they do not have the legal capacity to enter into a contract.
Documentation
To successfully transfer your shares, certain documents need to be tendered, vetted and approved. This process is necessary to authenticate the transaction. Some of the documents you are required to tender include; a stock transfer form, share certificates, share purchase agreement, stamp duty, and board resolutions among others.
Approval and Registration
This constitutes the final procedure in concluding your shares transfer process. Share transfer does not become effective unless approved and registered by the company. This process generally involves the following steps:
Preparation of documents
Payment of stamp duty
Delivery of documents to the company
Securing board approval
Updating company documents
Confirmation of transfer
Tax Implications
When transferring shares, there are some tax issues to keep in mind. You might have to deal with capital gains tax, inheritance tax, or even stamp duty, depending on the situation. Understanding these taxes can help you avoid surprises and plan better for the transfer.
Capital Gains Tax
Capital Gains Tax simply refers to the tax levied on the profit realised upon the sale or disposal of an asset. Shares transferred to your children may be subject to the payment of this tax. However, if your spouse is the beneficiary of such a transfer, then CGT is not payable.
The best way to manage the payment of this tax is to hire a competent tax lawyer. Alternatively, to avoid paying a lot of tax, you should consider spreading the amount payable over several years. This can help you take advantage of multiple CGT allowances.
Inheritance Tax
When you transfer your shares to your children, they will be considered gifts. This makes them subject to inheritance tax, especially if the transferor dies within seven years of making them.
The percentage of tax that needs to be paid will depend on the years that passed between the period you transferred the gift and your death. The tax payable is based 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
It should also be noted that up to £3,000 worth of gifts can be made yearly without being subject to Inheritance Tax. This is referred to as an “annual exemption”. A clever way to transfer shares to your children while reducing the tax burden is in yearly batches. Ensure that each annual batch does not exceed £3,000. It is also possible to carry any unused portion of your annual exemption forward to the following year (although only for one year).
Stamp Duty
Stamp duty is a tax payable on all documents that apply to the transfer of shares and securities. Stamp duty shouldn’t be confused with the Stamp Duty Land Tax (SDLT) which is payable on property and land transactions in England and Northern Ireland. This form of stamp duty only applies to the transfer of shares and securities.
Stamp duty is only payable by the purchaser, and the going rate is 0.5% of the total value of the transfer. This figure is usually rounded up to the nearest £5.
Note that stamp duty is not payable when shares are transferred for less than £1000 (including any connected transfers). Also, stamp duty does not have to be paid on shares given as gifts.
Trust and Legal Structures
Setting up a trust to hold shares for your children is a simple way to protect and manage the assets more easily. With a trust, you can control how and when your children receive the shares, ensuring it fits their needs. This section explores the benefits of creating a trust, the types of trusts you can choose from, and the key legal and tax points to consider.
Setting up a Trust
A Trust is a legal arrangement that allows one person or entity to manage assets for the benefit of another person or group. The person who provides the asset is the settlor, the one managing the asset is the Trustee, and the one who is to benefit the asset is the beneficiary.
Setting up a Trust to help protect your children’s interests can offer many advantages regarding asset protection and management. Some of the benefits include:
It can help reduce or eliminate the Inheritance Tax on such assets.
It can also be quite beneficial in terms of protecting assets from factors like divorce, creditors, and even the legal right to inheritance.
It is a tax-efficient way to manage assets.
It can also be used to protect vulnerable beneficiaries. This category of beneficiaries includes infants, those with learning disabilities, as well as those with certain mental health conditions.
Trusts can also provide a more private setting in probate proceedings
Bare Trust vs Discretionary Trust
Bare and Discretionary Trusts are two common types of trusts used in estate planning and asset management. They differ primarily in the level of control and flexibility they offer.
A Bare Trust is the simplest form of Trust structure. In bare Trusts, the Trustee holds an asset in Trust for one or more beneficiaries in clearly defined portions. I.e., the portion accruing to each person is clearly set out by the settlor.
When you create a Bare Trust, specific beneficiaries who have absolute rights over the capital, assets, and income in the trust instrument are named. This implies that while the trustee holds the legal title to the trust, the beneficiary(ies) hold the beneficial ownership of the property. This gives the beneficiary absolute control over the trust property, even though it remains in the Trustee's name. This type of trust is usually used for underage children, who do not have the legal capacity to take legal title. This type of trust is often rigid in nature.
A Discretionary Trust on the other hand vests the power and control over Trust assets in the Trustee. I.e., the Trustee has the discretion to deal with trust property as they deem best for the benefit of the beneficiaries.
A Discretionary Trust is usually set up for one's children or unborn grandchildren. This ensures that no singular beneficiary has an absolute entitlement to trust assets. The trustee determines how much each beneficiary in the trust gets. The trustee also determines how and when each beneficiary will receive their share of the trust property.
The main advantage of this type of trust is the flexibility it offers. This may come in handy when setting up a Trust for unborn generations. Also, it helps to protect assets. For example, if the beneficiary is going through a divorce, the trust may remain inactive until after the proceedings have been concluded. Furthermore, putting assets in a trust may help mitigate the tax burden, as an outright inheritance will subject the beneficiaries to the inheritance tax.
Legal And Tax Implications For Transferring Your Shares Into A Trust
Transferring shares held in a trust can have significant legal and tax implications. Understanding these implications and seeking professional advice before making any decisions is crucial.
The tax implications of transferring your shares into a trust may warrant the payment of a Capital Gains Tax, Inheritance Tax, or even an Income Tax. However, the type of tax payable and the amount to be paid may vary, depending on the jurisdiction, the type of trust, and the surrounding circumstances.
On the other hand, the legal implications of transferring shares into a trust dictate that such transfer must be in tandem with the prevailing legal provisions. Strict adherence to these legal provisions may make or mar the validity of your trust instrument. For a share transfer to be valid, it must comply with the Trust deed provisions. Beneficiary rights must be adequately defined. The type of trust instrument employed must also be clear. It is also imperative that the Trustee executes their duty as a fiduciary perfectly.
Potential Challenges And Risks
While beneficial, the share transfer process can also come with its own set of challenges and risks. It’s important to be aware of these potential issues to avoid any complications down the road.
Loss of control: A major risk associated with transferring your shares into a trust is the possible lack of control, especially in the case of a discretionary trust. The trustee is saddled with managing the Trust instrument as he deems fit, and there is also the risk that the trustee may mismanage it.
Dispute among beneficiaries: Disputes can arise among beneficiaries, particularly if the trust is not properly structured and managed.
Legal restrictions: Assets held in a trust may be subject to legal restrictions on their transfer or sale, which can limit liquidity.
FAQs
Can I transfer shares to my child without paying taxes?
Transferring shares to your kids incurs the payment of a Capital Gains Tax on such a transfer. When such a transfer is made, it is generally considered a gift, which warrants an Inheritance Tax. However, you may be shielded from paying the Inheritance Tax if you transfer such shares into a trust. You can also reduce the CGT payable by spreading such payments over several years.
What are the legal steps for transferring shares?
The steps involved in share transfer have been examined above. However, here’s a quick recap:
Preparation of Share documents
Payment of stamp duty
Delivery of Share documents to the company
Securing board approval
Updating company documents
Confirmation of transfer
How does transferring shares affect my child's future liabilities?
This depends on what your child decides to do with the shares in the future. However, below is how such a child could be affected in the general sense of it.
Capital Gains Tax: If your child sells the shares in the future, they may be subject to capital gains tax on any profit realised.
Inheritance Tax: If your child inherits the shares upon your death, they may be subject to Inheritance Tax. This tax becomes invalid if you remain alive for up to seven years after making such a gift.
Trusts: Placing the shares in a trust can mitigate inheritance tax liabilities.
What happens if the company’s shareholder agreement restricts share transfer?
Where the company restricts share transfer, your options may be limited. However, this restriction is often subject to meeting specific criteria and requirements. Once these requirements have been successfully satisfied, then there should be no reason you shouldn’t be able to transfer your shares to your offspring.
Is it better to gift shares or place them in a trust?
This depends on what you want for your children. Choosing a mode of transfer is up to your discretion. However, the surrounding circumstances should be given significant consideration. While gifting your children may provide them immediate access to such shares, putting them in a trust offers more tax incentives. The consensus is that you consult a competent tax attorney or an experienced financial advisor before making any decisions.
Conclusion
Transferring shares to your children is a noble gesture. Doing this can help give your children and even the unborn generation a leg up in life. However, doing this properly takes a lot of steps. It is best to avoid complications while going through this process by consulting competent tax attorneys.
Our specialist family solicitors at Lawhive can help you navigate these intricacies seamlessly. If you have further questions or are about to take the bold step of transferring your shares to your children, do not hesitate to contact us.