How to transfer shares, and using Gift Hold-Over Relief to defer taxes

As a shareholder in a startup or private company, you might find yourself in a situation where you need to transfer your shares to someone. At SeedLegals we see people using Share Transfer forms for all sorts of reasons including:

• shareholders giving shares to their husband or wife (‘gifting’ their shares)
• founders selling their shares to a buyer
• angel investors transferring their shares, either by way of sale to follow-on investors or as a gift to family members
• founders transferring shares to new co-founders (but note the ERS issue, below)

What many people don’t know is that there are significant tax considerations to take into account whenever one person transfers shares to another. These depend on whether you’re:

• selling your shares in exchange for cash, or
• giving your shares to someone for free (for example, as a gift)

In this article, we’ll outline the tax on selling or transferring shares for both parties so both you and the recipient don’t get any nasty surprises when your tax bill arrives.

What’s in this article

• Important facts about tax on share transfer
• What tax do I pay when I sell my shares?
• How do I transfer shares to someone as a gift?
• When you give shares as a gift, you are liable to pay tax
• How to transfer shares tax-free with Gift Hold-Over Relief
• How to pay the tax you owe on a share transfer
• Hiring a new co-founder or employee and want to give them shares?
• Ready to transfer your shares?

Important facts about tax on share transfer

In case the rest of this article is TL;DR, here are three important facts we want all our customers to know:

• You can get tax relief on some types of share transfer
  Gift Hold-Over Relief is designed to defer the Capital Gains Tax (CGT) that you’d owe if you transfer shares for free or below market value.
  Business Property Relief can apply to reduce any Inheritance Tax (IHT) that might apply – either at the date of gift or if the person giving the gift dies within seven years of gift.
• HMRC never see a transfer to an employee as a gift
  If the share transfer is from someone connected to the company, to someone who is, or will become, an employee or director of the company, then the transfer might be deemed an Employment Related Security (ERS). This means that the value of the shares they receive could be considered to be income, so it would be subject to Income Tax, rather than CGT. In this situation, Gift Hold-Over Relief can’t apply. We’ve explained more about this below. (‘Connected to’ here means for example a founder who is considered to have control over the company, either by overall share ownership or voting or other rights.)
• Transferring shares is complicated
  Get expert help. Before you do a share transfer, make sure you seek your own independent legal, accounting and tax advice, particularly if the person receiving the transfer is or will become an employee or director of the company.

What tax do I pay when I sell my shares?

In general, you’ll need to pay Capital Gains Tax when you sell (or give away for free) an asset such as shares. The amount of tax depends on factors such as your income, the amount of capital gains that you made from the transfer of shares during a tax year, etc.

HMRC has a useful capital gains tax calculator that you can refer to when you’re planning to do a share transfer.

In general, if the transfer isn’t eligible for Business Asset Disposal Relief, the gain from the sale of shares which is over the annual Capital Gains Tax allowance (at April 2022, this allowance is £12,300) is taxed at the normal Capital Gains Tax rates. Currently CGT is 20% for higher and additional rate taxpayers, and 10% for taxpayers whose income and gains don’t exceed the basic rate bracket (source: gov.uk).

Until April 2020, Business Asset Disposal Relief was called Entrepreneurs’ Relief. If you’re eligible, you’ll pay tax at 10% on all gains on qualifying assets. Check the gov.uk website to find out if you could be eligible for this relief.

In any case, consult your tax advisor so that you can be absolutely sure about your tax liabilities when you transfer shares by selling them.

When does Inheritance tax (IHT) apply on a gift of shares?

IHT can apply if the gift of shares (or sale at less than the market value) is to an individual and the person making the gift dies within seven years of the gift.

For other types of ‘gift’ such as transferring shares into a trust or to a company, IHT can apply immediately.

IHT is a complex topic and not addressed in detail in this article. If you’re considering gifting or transferring shares for free or for less than market value, seek qualified tax advice before you make the transfer.

Do you only pay tax when you sell shares?

As well as these tax implications when you transfer shares, when you buy shares, you might need to pay Stamp Duty. Read more about Stamp Duty when buying shares at the gov.uk website.

How do I transfer shares to someone as a gift?

Quite often, a shareholder (who might also be a founder) wants to give their shares as a gift to another shareholder (who might also be a co-founder), or to a family member. By ‘gift’ here, we mean giving shares for free or selling shares for less than their market value.

The good news is that there’s no Capital Gains Tax on assets (including shares) if you give them as a gift to your spouse or civil partner – unless you’re separated and didn’t live with them at all in that tax year.

If you gift shares to a family member other than your spouse or civil partner, then you and the recipient are liable for tax in the same way as if the recipient wasn’t related to you.

The general rule is that when a person makes a gift of a ‘chargeable asset’ – such as shares in a company – this is considered to be a ‘disposal’, which could create a ‘chargeable gain’ – a gain for which you’d incur Capital Gains Tax). In this way, if you gift a chargeable asset, it’s the same as if you transfer them in exchange for money.

However, for CGT in the case of a gift of shares, what’s important is the market value of the shares at the time you ‘dispose’ of them. The rationale behind this is that the tax is imposed on the increase of the value of the shares during the time you’ve been holding them. So if the value of the shares has increased from the time you acquired them to the time you give them away for free, then that increase is taxable.

To show how this works, here’s an example:
Let’s say you received 2,000 Ordinary shares at a nominal value of £0.001 per share. After the company does a funding round, the market value of these shares will increase – now they’re worth £10 per share. This means that if you want to give these 2,000 shares away for free, you could be liable for Capital Gains Tax calculated on the difference between the current market value of the shares (£10 x 2,000 = £20,000) and the acquisition value of the shares (£0.001 x 2,000 = £2) – so the taxable ‘gain’ is £19,998.

For IHT, if you’re gifting shares, what’s important is the reduction in value of your estate (broadly your net personal value) as a result of the gift.

When you give shares as a gift, you are liable to pay tax

This can seem strange: when you give away shares for free (or for a sale price that’s less than market value), how come you might have to make a tax payment to HMRC? Shouldn’t it be the person receiving them that pays the tax..?

If you were holding shares which went up in value, it can feel that you haven’t ‘earned’ anything from them. But it’s that gain in value that means you’d have to pay CGT when you give them as a gift. As far as HMRC sees it, you’ve made money on those shares and you haven’t yet paid tax on that gain. Oh, and the person who receives the shares will be liable to pay tax but later on – when they later transfer or sell the shares.

But wait! There’s a way to transfer shares as a gift without paying CGT. Keep reading…

How to transfer shares tax-free with Gift Hold-Over Relief

Gift Hold-Over Relief makes it possible to give away your shares as a gift to another UK resident, tax-free. This relief doesn’t apply if you give shares to a company.

Gift Hold-Over Relief doesn’t exempt any of the chargeable gain, but instead postpones the tax liability. The relief is designed to allow people to give away shares as a gift without a tax charge falling on the person making the gift.

For Gift Hold-Over Relief to apply, the chargeable gain is calculated in the usual way explained above. Quick recap: the chargeable gain is the price per share at your last funding round minus the price you paid when you acquired the shares. This gain is deducted from the market value of the shares to establish an artificially low ‘acquisition cost’ for the individual receiving the shares.

When the person receiving the shares sells them on in the future, their chargeable gain is worked out by deducting the artificially low acquisition cost from the sale price or market value.

If this person decides to give away the shares in future as a gift, they could use Gift Hold-Over Relief again! Magic.

To be eligible for Gift Hold-Over Relief when you’re giving away shares:

• The shares must not be for a company listed on any recognised stock exchange
  Or if it is, you have at least 5% of voting rights in the company.
• The company’s main activities must be in trading
  For example, providing goods or services rather than non-trading activities like investing. Even if relief is available, it will be restricted pro rata if the company (or group) holds assets that aren’t used for trading purposes (such as investment assets).
• The recipient must be a person resident in the UK for tax purposes
  If the person receiving the shares becomes non-UK resident within six years of the end of the tax year of the gift, then they’ll have to pay tax on the amount equal to the gain on which you claimed the relief.

With Gift Hold-Over Relief, you don’t pay Capital Gains Tax on the shares you give away, but you might be liable to pay tax if you sell an asset for less than it’s worth to help the buyer, or if you make a gain on what you paid for the shares originally.

To claim Gift Hold-Over Relief, you must apply to HMRC jointly with the person receiving the shares, at the time you give them the gift.

You’ll need to fill in form HS295 and include it with your Self Assessment tax return.

For a full explanation of Gift Hold-Over Relief, read the gov.uk webpage.

How to pay the tax you owe on a share transfer

You’ll need to declare share transfers on your tax return. If you claim Gift Hold-Over Relief, make sure you include a copy of the relief claim form in your Self Assessment return.

From the information in your return, HMRC will calculate what you owe and you’ll be charged as usual – either through PAYE via a change in your tax code, or in Self Assessment payment.

If you’re not sure what to do or how to pay, ask your accountant or tax specialist.

Hiring a new co-founder or employee and want to give them shares?

If you transfer shares to a new co-founder or employee, the shares might be classed as an Employment Related Security. In this case, instead of gifting shares to your employee, both you and the employee might be better off if you give your new colleague EMI share options instead.

How to give share options with an option scheme

It’s easy to create your EMI Option Scheme on SeedLegals. At SeedLegals, we’ve helped thousands of companies set up and manage their option scheme. We’re the UK #1 – we set up more EMI Option Schemes than anyone else.

To issue share options, you’d usually create a share option pool (this is also easy to do on SeedLegals). Then you can issue tax-efficient EMI options to your new colleague.

Sorted. Or is it? When you create an options pool, you dilute the shareholding of all the existing shareholders – which they probably won’t be thrilled about.

How to give share options without creating an option pool

Is there a way to give your new co-founder or employee options without diluting the other shareholders? Yes – you could give them share options over some of your shares.

To do this, you need a contract between you, the employee and the company – it’s known as a tripartite agreement. This agreement gives the employee share options in the company – but over your shares, rather than from an option pool.

The agreement prevents you from selling all your shares – because if you did, the option arrangement wouldn’t be enforceable. The agreement also set out the conditions for you having sufficient vested shares, including if you’re a Bad Leaver and so on.

Be aware that you’ll have a taxable capital gain on exercise if the exercise price is more than the original cost you paid for the shares.

We don’t yet offer a tripartite agreement on SeedLegals because it needs to be unique to each company and it isn’t commonly asked for. Instead, we can refer you to a law firm who can create the agreement for you. If you think this way of giving share options might be right for you, hit the chat button to ask us and we’ll be happy to help.

Ready to transfer your shares?

After you’ve considered the tax implications of your transfer, it’s super simple to do a share transfer on SeedLegals. Register or log in to create and sign all the paperwork you need including the Board Resolution, Deed of Adherence, J30 and more.

If you have questions about transferring your shares, our team is here to help. Hit the chat button to speak to our experts or book a call below.