Giving Away Shares in Family Company

Have you ever wondered if giving away shares in a family company could save you money on taxes—or even help secure your family’s future for generations to come? If the answer is yes, then you’re in the right place. We will explore what you need to think about when handing over shares in a business that you or your family created. We’ll also highlight the changes introduced by the Budget on 30 October 2024 so you won’t get caught out by new rules coming into effect.

Whether you’re aiming to protect your assets, cut back on taxes, or set up your children for success, there are a number of things to consider first.

The Big Picture: Why Gift Shares?

One of the most common ways people plan for the future (often called “estate planning”) is to give assets away during their lifetime rather than wait until after they pass on. This can be especially popular in families who own thriving businesses. By transferring shares now, you might:

1. Reduce Inheritance Tax (IHT): Getting shares out of your estate could lower the tax bill your heirs eventually face.
2. Secure Family Control: If you pass shares to children or trusts, you might shape who holds ownership—and how the business evolves.
3. Lock In Current Tax Reliefs: Rules can change (and they do!), so giving shares while relief rates are still favourable might save a lot of money later.

However, none of this is a simple “slam dunk.” Giving away shares too soon—or in the wrong way—can lead to unexpected capital gains or inheritance taxes. That’s why understanding each step is crucial.

Two Important Taxes to Keep in Mind

Inheritance Tax (IHT): Inheritance Tax can seriously impact what happens after you pass away. Right now, certain types of business shares qualify for Business Relief (BR), which can reduce or even eliminate IHT on those shares. However, the October 2024 Budget changed a lot about how this relief works. For transfers made after 6 April 2026, each person’s BR is limited to £1 million.

What does that mean for you?

• If you give shares now—while you can still rely on the higher BR relief (for example, if your share value is under £1 million)—you might secure an IHT advantage that won’t be around later.
• If your shares are worth more than £1 million, be extra careful about timing. You don’t want to miss out on the best available relief before it’s cut down for future transfers.

Capital Gains Tax (CGT): The other big tax that comes into play is Capital Gains Tax. If the shares you give away have grown in value since you got them, you’ll often owe CGT on that “gain.” That said, there are some helpful reliefs, like “hold-over relief,” which allows you to postpone a capital gain until the person receiving the shares sells them in the future. This can be especially handy when shares are gifted to certain trusts (more on that later).

Why Changes in the Company Could Affect Your Decision

Sometimes, changes in your business itself might prompt you to give shares away earlier than you planned:

• Shifting from Trading to Investment: If your business is starting to focus on investment activities rather than actual trading, you might risk losing full BR in the future. Gifting now could lock in tax advantages before the nature of the company changes.
• Potential Sale or Liquidation: If the company is sold or wound up soon, the proceeds will turn into cash or assets that don’t qualify for Business Relief. By gifting earlier, you might lock in relief on the shares before they become non-qualifying assets.
• Bringing Children Onboard: If your kids (or other family members) are set to help run or eventually take over the company, you could transfer some shares to them now. This paves the way for succession planning—and might let them build up experience while you’re still around to guide them.

Types of Lifetime Gifts: Outright vs. Trust

Outright Gifts

This is the simplest option: you just hand the shares directly to another person. They now own them (subject to any rules in your company’s articles of association or shareholder agreements). Here are a few things to watch out for:

• Risk of Divorce or Bankruptcy: If your child (or whoever gets the shares) goes through a divorce or becomes bankrupt, those shares could be at risk.
• IHT Impact: The shares will count towards the recipient’s estate for their own Inheritance Tax. That may or may not be a concern, depending on their situation.

Gifts into Trust

If you want to hold onto more control—maybe to prevent the “fragmentation” of shares or to protect your family’s interests—you could create a trust. This means the trustees (who might include you) legally hold the shares for the benefit of certain people (the “beneficiaries”). Trusts can:

1. Avoid Direct Ownership Conflicts: If you have multiple children or family members, the trustees decide how to manage shares and dividends fairly.
2. Keep Voting Power in Fewer Hands: This prevents each new shareholder from having a vote, which might lead to chaos or disagreements.
3. Protect Assets from Divorce or Bankruptcy: Shares inside a trust are generally harder for creditors or ex-spouses to claim.

Remember: trusts have ongoing administration, like registering with the Trust Registration Service and possibly filing annual tax returns.

How Gifts Affect Inheritance Tax (IHT)

Potentially Exempt Transfers (PETs)

If you give shares directly to someone, that’s often a PET. There’s no immediate IHT charge, but if you die within seven years, the value could still count towards your estate. If you survive the full seven years, it’s usually considered out of your estate for IHT purposes.

Trust Transfers

Putting shares into a trust is more complicated. It’s usually treated as a chargeable transfer. But if the shares qualify for BR (up to your £1 million limit) or if you have an unused nil rate band, you might avoid an immediate IHT bill. If you pass away within seven years, the shares remain outside your estate if the trust still holds them and they remain qualifying.

Important: If the person (or trust) that got the shares sells them before your death, the BR might get “clawed back,” meaning no relief from IHT. This can be especially harsh for direct gifts (PETs). With a trust, the rules can be more flexible, and the trustees typically decide if and when to sell.

How Gifts Affect Capital Gains Tax (CGT)

When you give shares away that have gone up in value, you might face a CGT bill. However, you can often claim hold-over relief on gifts of unquoted trading company shares. This allows you to postpone the gain until the recipient eventually disposes of the shares.

• Gift to Individuals: Business Asset Hold-Over Relief may apply, though it might be partially restricted if the company holds non-business assets.
• Gift to Trusts: Typically, you can claim full deferral if neither you nor your spouse is a beneficiary. When the trust later passes the shares to family members, more hold-over relief can apply—pushing the CGT to a future disposal event.

Also, consider the CGT uplift on death: if you hold onto assets until you die, any growth in value gets wiped out for CGT purposes. That’s usually beneficial for your heirs. But if the future BR rules look worse and you risk a higher IHT, you might prefer gifting now to lock in 100% relief on a bigger portion.

Heads up: Business Asset Disposal Relief (BADR) (previously called Entrepreneurs’ Relief) offers a 10% CGT rate on lifetime gains of up to £1 million. This will increase to 14% after 6 April 2025 and then to 18% after 6 April 2026. Strategically gifting shares to multiple people could mean each person might qualify for some BADR, spreading out the CGT savings.

Beyond Taxes: More Things to Consider

1. Holistic Estate Planning: Gifting business shares is just one slice of the pie. Look at your home, savings, life insurance, and other assets to make sure all decisions fit together sensibly.
2. Future Control: If you give away too many shares too soon, you might lose some influence over the company. That might be a fair trade-off, but think carefully before finalizing it.
3. Protecting Vulnerable Family Members: Some relatives might need extra safeguards—like a trust structure—if they can’t manage money on their own or if they’re minors.
4. Preserving the Company: If one child works in the family firm and another doesn’t, a trust can handle that balance fairly, so everyone benefits without risking the business’s daily operations.

How to Move Forward

Gifting shares in a family company can unlock incredible opportunities to save on taxes, strengthen family bonds, and guarantee the business’s future. But it’s also complicated. The new limits on Business Relief and the shifting rates for CGT and BADR make timing and structure vital.

Before you take the leap:

1. List Your Priorities: Are you trying to avoid a huge IHT bill? Set up your children for ownership? Keep the company running smoothly even after you retire.
2. Get Expert Advice: Talk to a tax advisor or solicitor who knows how to navigate these changing rules. They’ll help you figure out whether an outright gift, a trust, or a blend of both is best.
3. Stay Flexible. Tax rules change constantly. A perfect plan now might need updating in a few years if the law shifts again.

If you’re still curious about how gifts of shares could work in your unique situation, or you have concerns about the new restrictions, reach out to a professional who can guide you. By taking action sooner rather than later, you can lock in current reliefs and protect your family business for years to come.

Remember: This isn’t just about avoiding taxes. It’s about safeguarding the legacy you and your family have built and ensuring the business can keep thriving for the next generation. By being proactive, doing thorough research, and seeking specialist tax advice, you can create a strategy that benefits everyone—while still staying on the good side of HMRC. Happy planning!