The below article explains the tax and legal implications to consider for non-spousal share transfers. It includes information about bringing a shareholder on board to your limited company, re-organising your company structure and a few things which may apply to the transfer such as capital gains tax, stamp duty and gift relief.
Re-organising your company structure
To ensure you do not fall foul of HMRC ‘Settlements legislation’ there ideally should be an underlying commercial basis for any share distribution. This is to prevent individuals from shifting their income onto another individual and using additional tax allowances in order to maximise tax efficiency.
A commercial basis could be how much income an individual is generating for the company, how much work they are doing for the company for example bookkeeping or administration, or simply how much they are paying for the shares.
Tax and legal implications
Shares carry voting rights and represent ownership in your company.
In order to overrule the votes of other shareholders an individual must hold at least 75% of the overall shareholding. This is important for significant company decisions such as closing the company or changing the company name.
Once transferred, shares cannot just be "taken" back and will need to be given up actively as they will be the property of the new owner.
Frequent share changes can be frowned upon by HMRC.
If the new shareholder is to be appointed as a director and paid a salary they must be happy to accept all associated responsibilities and duties that come with directorship.
Capital Gains Tax
Due to the share transfer being between non-spousal business partners it may give rise to a taxable capital gain. As the shares represent part ownership of your company, they have value and cannot be given away for nothing (they are seen to be transferred at market value).
The date at which the market value must be established is clarified by HMRC in the this link.
We are unable to perform an official company valuation for you here at Ember but we work with a partner firm who can help. Please let us know if you would like us to refer you across and we can do so.
Alternatively HMRC may be able to provide you with a valuation, they can be contacted here.
There are several techniques for valuing a company, one being the retained profit at the time of transfer, but you may need to speak to an independent financial adviser about this in more detail.
Capital gains tax would likely be due if the value of the shares being sold/gifted are valued above the capital gains allowance of £12,300. So if you are gifting 50% of your shares, the overall company would need to be worth more then £24,600 for a capital gain to be chargeable on the shareholder gifting/selling the shares.
If a consideration (cash or another form of value) for more than £1,000 is given as payment for the shares then there will be stamp duty due of 0.5% on this amount (rounded up to the nearest £5). Stamp duty will be processed via sending the stock transfer forms to HMRC to be stamped, and the relevant payment can be made online.
Details of how to pay can be found here.
If the shares are transferred as a gift or sold for less than market value a gift relief claim can be made.
This defers the gain from the person giving away the shares to the person receiving the shares. This then puts the new shareholder in the same position as the original one - i.e.. as if they had paid market value for the shares (this method also eliminates the need for stamp duty to be paid).
We would not recommend making a claim for gift relief unless there will be capital gains due on the sale of the shares (over £12,300) or the person you are transferring the shares to already has capital gains.
Please see this HMRC link for more details about gift relief.
Creating Additional Shares
You may need to create additional shares if you only have 1 share for instance. If you have 100 shares you will likely have enough shares to split in the proportion you want.
We would recommended subdividing your shares in this instance:
Sub-division is where your existing shares are split into more shares with lower individual nominal values. For example:
You have 1 share at £1 which you then split into 100 shares at £0.01 each.
The overall nominal value of the shares do not change but there are now more shares which gives more flexibility when organising your share structure as there are more shares which can be transferred between parties.
This option can have administrative advantages compared to issuing more shares as it less likely to trigger an employment related securities filing requirement with HMRC.
Employment Related Securities (ERS)
An employment related securities form (ERS) may be required depending on the type and nature of the transaction taking place. This form is used to report any shares that have been received by a company employee/director that have been received as a direct result of the employment.
HMRCs guidance on ERS can be found here.
You do not need to file and ERS form if the share transfer is to non-employees or directors or if the share transfer takes place before the company begins trading.
There are also circumstances where an ERS form is not required including a share transfer of a domestic, family or personal relationship.
Making a decision
If you are ready to make a decision on your company structure then please send us a message to confirm:
The details of the persons shares will be transferred from/to including:
Date of Birth
National Insurance Number
As well as:
Confirmation if you would like Ember to approach someone to complete a share valuation for you.
What date you wish the shares to be transferred
What the resultant share distribution will be
Ember will then be able to action this for you and ensure the relevant forms are updated with Companies House
We appreciate this is a lot to take in, please do get in touch with us if you have any further questions on this!