Best way of giving shares to sons

MP writes: I own a small tyre company which has an issued share capital of £100. I own all the shares, but have recently retired, leaving my sons to run the business. They have worked in the business for several years. I would now like to reward their efforts by giving them shares in the business. I would like to know if it would be preferable to gift them my 100 shares or issue them with new shares?

You need to be clear in your mind about what you are trying to achieve, writes Jon Sutcliffe, partner at Kingston Smith LLP. If you were to give all of your 100 shares to your sons then you would no longer have any interest in the company. On the other hand, if you issue new shares you will still have partial ownership of the company.

If you give your sons your shares then for capital gains tax purposes you are connected and your gift will be deemed a disposal at market value. However, there is relief for gifts of business assets that hold over any theoretical gain until your sons dispose of the shares. In practice, this means they inherit the original cost of the shares from you. The shares will qualify for business assets where the company qualifies as a trading company. Given your description of the trade it is likely to qualify unless there are any significant assets or activities carried on by the company that are not related to the tyre trade. If you do not want to claim the relief then you may qualify for Entrepreneur’s Relief on the disposal. Again the shares need to be in a company that is trading, but the benefit of this to your sons would be a higher base cost on their shares should they dispose of them in the future. As a gift, the transfer will avoid the payment of Stamp Duty.

Many transactions involving shares given to employees have complicated tax consequences. In your case however, it is likely that the transfer will fall into the exemption for transfer by reason of a family or personal relationship.

The shares are likely to qualify for business property relief so there should be no exposure to inheritance tax. Should your sons decide to sell on the shares in the company, you would need to review the position as there are circumstances where business property relief can be clawed back.

Issuing new shares would have similar tax consequences to a gift, as outlined above.