The dawning of a new tax year commonly sees a flurry of share transfers as business owners seek to ensure their extractions of profits are tax-efficient. However, transfers of shares between family members and employees can hold lots of hidden tax charges.
Here are three of the main types of transfers:
1.Transfers of Shares Between Spouses are Tax-free
All transfers of assets between married couples and civil partners can take place tax-free. For Capital Gains Tax the transfers take place at no gain/no loss and it is also an exempt transfer for Inheritance Tax purposes as well.
Although transfers of shares between married couples are tax-free, care should be taken to ensure the remuneration for married couples is beneficial from a tax point of view. In particular it is possible – although unlikely – that HMRC may try to argue that dividends remain taxable on the donor spouse rather than the donee spouse.
We recommend any transfers between spouses should be checked over by a tax advisor to ensure profit extraction is tax-efficient.
2.Transfers of Shares Between Family Members
Gifts and transfers of shares between family members outside marriage and civil partnerships are always taxable and represent notional sales at market value. The transferor will pay Capital Gains Tax based on the open market value of the shares at the date of gift.
In this situation, the transferor will be in the unpleasant situation of facing a CGT liability on notional proceeds which he/she has not received (!)
However, there may be an election available which defers payment of CGT on the transfer of shares and the shares may be transferred at no gain/no loss.
It is important specialist advice is taken prior to transferring shares between family members to avoid unwarranted Capital Gains Tax charges and also to consider the implication on future tax planning. Will the new shareholder benefit from Business Asset Disposal Relief? Will they be entitled to a flexible remuneration package? Is there any chance that HMRC could argue that the share transfer is because of employment rather than in the “ normal course of domestic, family or personal relationships” of the donee?
Any gift will also carry Inheritance Tax implications. In most situations a transfer of shares will be classed as a Potentially Exempt Transfer (PET) and as long as the transferor lives for 7 years after the date of the gift it will not be caught by Inheritance Tax on death.
It is also possible the gift may benefit from Business Property Relief (BPR) and will be exempt, however, this will depend on the individual’s circumstances.
3.Transfers of Shares to Employees
When an individual receives shares in their employer company they will be deemed to have received additional employment income equal to the market value of the shares. The shares will be subject to an income tax charge and – potentially – Class 1 NICs. If the employee pays the full market value for the shares then there is no income tax charge.
There are exceptions where the allotment of shares is made via a Tax Advantaged Employee Share Scheme or amongst family members. The key question to ask is “were the shares transferred by virtue of an employee’s employment?” If the answer is yes, then there may be an income tax charge to consider and the transaction must be reported on an ERS report to HMRC by 6 July following a tax year’s end.
Where the employee is restricted as to
(a) when an employee may sell them; and
(b) To whom,
It will artificially depress the market value and there are additional income tax charges when these restrictions are lifted.
However, once again, there are elections available which circumvent these additional tax charges.
We strongly recommend you speak to your advisor before undertaking any transfer or allotment of shares to an employee.
Even if a transfer of shares appears straight forward we recommend that you seek advice from a tax advisor to ensure you do not incur hidden tax charges, the most beneficial elections are made and that it produces the most tax-efficient result for you and your business.