In this month’s issue of EveryMonth we consider the tax issues for the recipient of a gift of shares in a company.

Your New Year’s resolution may have been to address the question of succession planning in your company.  With a family company the obvious solution may be a transfer of shares to a son or daughter.  Or you may have a key team member who you want to reward with a gift of shares.

Those advising you on how to go about making this transfer may focus entirely on your tax circumstances.  They may consider your capital gains tax position and inheritance tax on the transfer or on your death.

What is sometimes overlooked is the question of whether the gift of shares may come with an unwelcome tax bill for the recipient.

 For further information, please visit our selling your business page.

James Hunt and everyone at the

Everyman Legal Team

It is fairly common, particularly in established family companies, for shares to be passed from one generation to another.

You may be the owner, and Managing Director, of the company and your son, for example, may work with you in the business. Perhaps you would like your son to take over the running of the company and so you want to pass control to him by gifting him with your shares.

Your advisers will want to consider with you whether any gain in the value of the shares should be held over for capital gains tax purposes.  You will also want to consider Inheritance Tax.

But what of your son’s tax position?

Family member receiving shares

If shares are being gifted to your son then his income tax position must be considered.  Income tax is charged on employment income and this can, under general principles, include a ‘benefit in kind’ treated as income.  The Income Tax Employment and Pension Act 2003 (ITEPA) contains special provisions that seek to impose an income tax charge on shares received by employees where they do not pay the market value of those shares. This principle would apply to any employee receiving shares by reason of their employment.

So might the shares that you are planning to give by way of a gift constitute employment income for your son?

By reason of employment?

To constitute employment income the shares would have to be received by reason of your son’s employment with your company.

HMRC guidance makes clear that earnings may be paid by someone other than the employer.  So in your case the fact that the shares are coming from you not your company will not help.

ITEPA has a general exclusion for a “right or opportunity arising in the normal course of domestic family or personal relationships”.  But this will not cover your son for a benefit in kind charge under general principles.

HMRC’s view?

HMRC will accept that a gift does not count as general earnings if it is made on personal grounds.  However, it then adds that it is not possible to list the factors that will determine with certainty whether or not a gift is taxable as an employment related benefit in kind.

So far as the ITEPA exclusion is concerned HMRC comments that it will be a question of fact whether the exclusion applies.  It may be that the reason for the gift is because of the employment of your son not his relationship to you.

  Points to consider

Here are some factors which may be relevant to determining whether an income tax charge may arise on your gift:-

• Is your son already receiving remuneration form your company at a commercial rate?  A small salary might give greater scope for HMRC to try to apply a tax charge.
• How many other children do you have?  If it is just your employed child or children who are receiving the gift it will be harder to argue this is for personal reasons.
• It may be helpful to accompany your share transfer with a deed of gift and even a letter to your son explaining the reason for the gift.

Further guidance is available on the HMRC website.

HMRC Non Statutory Clearance

A non statutory clearance procedure exists.  In borderline cases where the evidence is not conclusive you may want to consider an application for clearance.

 Hints and Tips

• You may want to consider whether a sale of shares to your son (perhaps on deferred terms under an MBO) may be a better strategy.  This could allow you to benefit from a 10% CGT tax charge.
• Proceeding with an MBO sale might give better scope to achieve fairness between your family members.
• For further information, please visit our Management Buy Out page.