Gifting shares to family members

Gifting shares to your family members is an excellent method to introduce them to the world of investing and educate them about financial markets. However, there are some critical factors that you must consider before gifting shares to your children, including the tax implications.

Reasons for gifting shares to family members

There may be a variety of reasons for shareholders who gift shares to their family members. The most common reasons are as follows –

• To provide financial support to your spouse.
• The necessity of lowering your households tax burden (tax efficiency).
• To teach your child how to accumulate wealth and how to manage family finances more effectively.
• Transferring control of your business to a family member.
• Helping your children in financing their education.

If any of these sounds like a valid reason, here is a step-by-step guide to gifting shares to family members.

How to gift shares to family members

The simplest method of gifting shares to family members is as follows:

1. Completion and signing of a share transfer form

   – The first step is to complete and sign a share transfer form. The form is sometimes called a stock transfer form or with the name of J30. It contains information such as the companys name, your name, identification proof, and address, the class of shares, the number of shares to be transferred, and the reason for the transferring of shares (which should be gifting shares). It also includes the recipient name, their address, and their ID proof. After completing the information, you must sign the form.

   Since the transfer of shares constitutes a gift in this scenario, you will not be required to send any certificate to HMRC for stamping or payment of stamp duty land tax. You can begin to realise the benefits of gifting shares immediately.

2. Submit the completed form to the employer, along with any accompanying certificates

   – Depending on the company or a firm from which you purchased shares, you may submit the completed form via email, in-person or a company portal/account. You can inquire with the company about the fastest and most convenient method.

   The company receives and inspects the share transfer form. If there is an error, you will be contacted and given the opportunity to fix it. After that, you must wait for the companys board of directors to approve the transferability of shares. Occasionally, you may be asked to upload additional documents during processing. Such documents include those that establish your ownership of the shares you wish to gift to your family members. Once the transaction is approved, the company will issue a new share certificate in the new shareholders name. The procedure usually lasts between two to eight weeks.

If you believe that any of the above steps may be confusing, perhaps because you struggle to grasp financial matters, it is advisable that you should consult a financial advisor.

Tax consequences when you gift shares to family members

1. Capital gains tax

   – – When we talk about the tax consequences, here things get complicated. In case you are not gifting shares to your spouse or for charity, it means you are either transferring or selling them, and in such cases, you are liable to pay capital gains tax.

   1. In case you are selling shares

      – When you sell the shares, HMRC will first evaluate whether you qualify for a tax-free capital gains allowance (currently £6000). After that, reduce the amount of capital gains tax allowance from the gains you earned after selling the property. The capital gains tax will be paid on the remaining sum (Remaining sum = Capital gains – Capital gains tax allowance).

      For example, if you have purchased 5000 Ordinary shares at a price of £3 per share and the price grew to £15, your shares are now worth £75,000 (5000 x £15). You paid £15000 (5000 x £3) for them, resulting in capital gains of £60,000 (£75,000 – £15000). Now, deduct the capital gains tax-free allowance (£60,000 - £6000 (Tax-free allowance) = £54000) and tax the remaining amount, i.e.£54000.

   2. In case you are gifting shares

      – When you gifting or transferring shares to your spouse, HMRC exempts you from capital gains tax. As per the example stated above, you are not liable for capital gains tax if you gift 5000 shares to your spouse at the new price. If your spouse decides to sell these shares to any other person, it’s essential to pay capital gains tax.

      For children, this is not the case. Childrens shares will be taxed by HMRC. You are exempt only if you gift or transfer the shares to your spouse, civil partner, or a charitable organisation.

2. Inheritance tax

   – While transferring shares to your children, they are normally treated as gifts for inheritance tax purposes. If the transferor (parent) dies within seven years after making the transfer, the transferee (child) will be responsible for the inheritance tax.

   The amount of tax due will be determined by the number of years between the date of the gift and the date of death. It is based on a sliding scale known as taper relief: 40% for less than three years, 32% for three to four years, 24% for four to five years, 16% for five to six years, and 8% for six to seven years. Additionally, if you transfer shares to your children for less than market value, the difference between the sale price and market value is often treated as a gift by HMRC. This type of gift is referred to as a Potentially Exempt Transfer (PET) and will be subject to the standard inheritance tax rules.

If you have questions regarding the gifting of shares to family members, please speak to one of our dns experts right now.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.