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. There are a number of different reasons for doing so, and at SeedLegals, we see customers using Share Transfer forms across a range of different use cases, 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 most people don’t know is that there are significant tax considerations to take into account whenever a share transfer takes place. These depend on whether you’re:
- selling your shares in exchange for cash, or
- giving your shares to someone for free (e.g. as a gift)
In this article, we’ll outline the tax considerations of each so both you and the recipient don’t get any nasty surprises when your tax bill arrives.
But first an important note:
- Gift Holder Over Relief is designed to defer the capital gains tax that would be due on a transfer of shares at below market value.
- However, 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 may deemed an Employment Related Security (ERS) which means that the value received may be taxable as income, rather than CGT, where “connected to” in this context would e.g. mean a founder who is deemed to have control over the company, either by overall share ownership or voting or other rights.
So, please seek your own independent legal or accounting advice on this, particularly if the person receiving the transfer is, or will become, an employee or director of the company, it’s a complex area.
Where a share transfer may be classed as an Employment Related Security, you may be better off giving the new co-founder or employee EMI share options instead, you can create your EMI Option Scheme on SeedLegals.
Once you’ve considered the tax implications of your transfer, it’s super simple to do a share transfer online. Create a SeedLegals company account to create and sign all the paperwork you need including the Board Resolution, Deed of Adherence, J30 and more.
1. Selling your shares
In general, capital gains tax will need to be paid when you sell (or give away for free) an asset (such as shares). The amount of tax depends on many 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 set up a useful capital gains tax calculator for when you do a share transfer. You can always use this as a reference guide and keep it in mind when you are thinking of transferring shares. In general, where Entrepreneurs’ Relief is not available, the gain from the sale of shares which exceeds the annual Capital Gains Tax allowance (at this date of this article it is £12,300) is taxed at the normal Capital Gains Tax rates (20% for higher and additional rate taxpayers, 10% for taxpayers whose income and gains do not exceed the higher rate threshold). In any case, always remember to consult with your tax advisor or lawyer so that you can be absolutely sure about your tax liabilities when you transfer shares by way of sale.
2. Transferring shares to someone as a gift
Quite often, a shareholder (who may also be a founder) wishes to gift his or her shares to another shareholder (who may also be a co-founder), or to a family member of his. The good news is that there is no Capital Gains Tax on gifts of assets (including shares) you give to your spouse or civil partner.
The general rule is that when an individual makes a gift of a chargeable asset (e.g. shares in a company), this is considered to be a disposal which may give rise to a chargeable gain in the same way that a transfer in exchange for money would bring about.
However, in the case of a gift of shares, the market value of the shares at the time of disposal is taken into account for capital gains tax and inheritance tax purposes. The rationale behind this is that the tax is imposed on the increase of the value of the shares during the time that the person has been holding them (i.e. if the value of the shares has increased from the time they acquired them to the time they gave them away for free).
A founder may have received 2,000 Ordinary shares at nominal value (usually at £0.001 per share). The market value of these shares will increase after the company has done a funding round, and now the market value of each share may be a lot higher (e.g. £10 per share). This means that if the founder wishes to give these 2,000 shares away for free, they could be liable for capital gains tax which would be calculated on the difference between the current market value of the shares (£10 x 2000 = £20,000) and the acquisition value of the shares (£0.001 x 2,000 = £2)…meaning that the remaining amount of £19,998 could be subject to tax.
Transfer shares tax free with Gift Hold-Over Relief
The Gift Hold-Over Relief provides for an easy and tax free way to give away your shares as a gift to another person (not to a company!). The Hold-Over Relief does not exempt any of the chargeable gain, but instead postpones any tax liability. It is designed in a way that allows shares to be given away as a gift without a tax charge falling on the person that is making the gift.
In order for the Hold-Over Relief to apply, the chargeable gain must be calculated in the usual way mentioned above (i.e. taking the market value of the shares as the consideration for the disposal – you can use the price per share of your last funding round, and deduct the price you paid when you acquired the shares), and then this gain will be deducted from the market value of the asset in order to establish an artificially low ‘acquisition cost’ for the individual receiving the shares.
When the person receiving the shares sells them on a later date, the artificially low acquisition cost is deducted from the sale price or market value to find the gain. However, that person may also use the Hold-Over Relief again and gift the shares to someone else.
Some other important conditions to keep in mind:
- The shares must not be listed on any recognized stock exchange.
- The company’s main activities must be in trading, for example providing goods or services, rather than non-trading activities like investment.
- You do not pay capital gains tax on any of the assets you give away, but you may be liable to pay tax if you sell an asset for less than it’s worth to help the buyer, or make a gain on what you paid for it.
Full HMRC gift holdover relief details here.
In order to claim the application of the Hold-Over Relief you must apply jointly with the person receiving the shares to the HMRC by completing the HS295 Claim form. You must send this claim form at the time you give the shares as a gift, and include this form along with you Self Assessment tax return.
If you have any questions or are looking to transfer your shares in any way, our team is here to help, just hit the chat button.
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