Transferring company shares to your children (i.e. minors under the age of 18) is a great way to get them interested in the world of investment and teach them about financial markets. However, there are a number of important points to consider before making the decision to transfer shares to your children, including tax implications and any company restrictions which may be in place.
Many public limited companies refuse child shareholders, and private limited companies will sometimes include a provision in their articles of association which prevents shares from being held by any person under the age of 18.
The reason that some UK companies have concerns about children being shareholders is because, in England, Wales, and Northern Ireland*, they are deemed not to have the legal capacity to enter into a contract. As such, this could relinquish any shareholder obligations placed upon them, which can make it tricky for the company to attract new investment.
Anyone considering transferring shares to their children should first check if there are any rules about minimum age limits for shareholdings contained in the company’s articles of association or shareholders’ agreement.
* Scotland has different rules, implemented by The Age of Legal Capacity (Scotland) Act 1991, whereby the legal age of capacity to enter into contracts is 16 (subject to certain exceptions).
Reasons why shares are transferred to children
Shareholders may wish to transfer shares to their children for a variety of reasons, including:
- Transferring an estate – individuals with significant share portfolios may prefer to resolve questions around inheritance by essentially distributing their estate to their children and loved ones while they are still alive.
- Tax efficiency – for smaller investors, gifting some of their shares to their children may help to ease the tax burden, although this is minimal.
- Keeping it in the family – if shares are held in a family company, gradually transferring these to one’s children can be a way of ensuring the business remains family-run.
- Financial lessons – parents who would like their children to take an active interest in finance and investment may be able to pique their interest by giving them some of their own shares.
Whatever the reason for transferring shares to your children, it is important to understand any issues and restrictions that could arise from such actions. It may be beneficial to consult an accountant or solicitor for independent advice.
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 of transferring shares involves completing a stock transfer form (also known as form J30). The information you need to be provide on this form includes:
- Name of the company in which shares are held
- The amount of ‘consideration money’ that is being paid for the shares – if you transfer shares for free, this should be “Nil”
- Description of security – this specifies the type of shares being transferred (e.g. if there is more than one class)
- Number of shares being transferred
- Name and address of current shareholder (the parent, in this case) along with their signature
- Name and address of person(s) receiving the shares (the child, in this case)
- Certificate 1: this needs to be completed if the amount being paid for the shares is £1,000 or less, which means that no Stamp Duty needs to be paid – in the case that a parent is gifting shares to their children and “Nil” is stated in the ‘consideration money’ section, this section can be left blank
- Certificate 2: this relates to other circumstances in which no Stamp Duty needs to be paid – this also does not need to be filled in if a parent is gifting shares to their children and “Nil” is stated in the ‘consideration money’ section
At this point, the stock transfer form would normally be sent to HMRC for stamping (where the consideration value is more than £1,000) and to process the Stamp Duty payment. However, in the case of a parent gifting their shares to their children, this step is not required and there will be no Stamp Duty to pay.
Company will check the transfer documents
The stock transfer form should then be sent to the company, along with the original share certificate. The form should be checked by the company and, in the absence of a provision in its articles of association restricting transfers to minors, the share transfer should normally be accepted. Approval of share transfers will normally be straightforward, but may require confirmation via board resolution, in which case board minutes should be issued.
A new share certificate(s) will be issued (in the name of the child/children). This should happen within two months of receipt of the stock transfer form. The company will retain the form and the original share certificate(s). Entries should be updated in the company’s register of members and register of transfers.
There is no requirement to inform Companies House of share transfers and new shareholders until the next confirmation statement is submitted.
1st Formations offers a Transfer of Shares Service for just £49.99 + VAT. This includes the Stock Transfer Form, Meeting Minutes and Share Certificates.
Potential tax implications
Capital Gains Tax (CGT)
Shares transferred to children will be classed as a disposal for purposes of Capital Gains Tax (CGT) – unlike the case of transferring them to a spouse where CGT is not payable.
To work out the level of tax, the difference must be calculated between the value of the shares when they were initially purchased and the market value upon their transfer to one’s children.
If this figure exceeds the annual CGT allowance (£12,300 for the 2020/21 and 2021/22 tax years) – either on its own or in combination with other CGT for the same year – then a tax rate of either 10% or 20% will need to be paid, depending on the level of Income Tax.
When transferring a large number of shares, to avoid a significant bill for CGT it may be worth considering spreading this out over several years, to take advantage of multiple CGT allowances.
When you transfer shares to your children, it will generally be considered as a gift for the purposes of inheritance tax. If the transferor (parent) dies within 7 years of making the transfer, the transferee (child) will be liable to pay inheritance tax.
The level of tax that needs to be paid will depend on the number of years that have elapsed between the gift being made and the death. It 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; 15% for 5-6 years; and 8% for 6-7 years.
It should be noted that up to £3,000 worth of gifts can be made each year without being subject to inheritance tax (known as an annual exemption). One way to transfer shares to your children whilst minimising the tax burden is to do so in yearly batches of £3,000. It is possible to carry any unused portion of the annual exemption forward to the next year (although only for one year).
You should also note that if you transfer shares to your children for less than the market rate, the portion between the sale price and the market value will generally be considered as a gift in the eyes of HMRC. Such as gift is known as a Potentially Exempt Transfer (PET) and will be subject to the normal rules of inheritance tax.
Annual dividends are normally paid to shareholders as a portion of profits generated by a company.
Children under 18 are entitled to receive the first £100 of income from savings or shares tax-free. However, anything over this amount will be added to the income of their parents and attributed to them for the purposes of income tax. As such, any tax efficiencies in respect of share dividends are negligible.
However, a stocks and shares Junior Individual Savings Account (JISA) allows children to hold up to £9,000 (2021/22 limit) worth of shares tax-free (this figure changes on an annual basis). Children can take control of a JISA from the age of 16, but cannot withdraw money until they are 18.
A more complex alternative to JISAs is for parents to create a trust for their children. Shares can be invested in a trust by the ‘settlor’ (in this case the parent) who will specify the ‘beneficiaries’ (their children). A trustee needs to be appointed to manage the trust.
There are many types of trusts, but the most common one which is used for managing assets for the benefit of children is known as a ‘bare trust’. Once the beneficiaries reach the age of 18 (or 16 in Scotland) they will be able to access the shares held in this trust and sell them.