The Pitfalls of Gifting Shares

Gifting shares can seem a simple and tax‑efficient way to pass value to family members, key individuals or trusts. It is commonly used in succession planning, family‑owned businesses and incentive arrangements. However, without careful planning, it can lead to unexpected tax charges, loss of control and long‑term complications for both the individual and the company.

1. Unexpected Tax Charges

A common misconception is that gifting shares avoids tax because no money changes hands. In reality, a share gift is usually treated as a disposal at market value for capital gains tax (CGT) purposes. This means the transferor may face a CGT liability despite receiving no proceeds.

While reliefs such as hold‑over relief (which allows any capital gain arising on the gift to be deferred so that it passes to the recipient and crystallises only on a future disposal) may be available in certain circumstances, this generally depends on the type of shares being transferred and who they are transferred to, for example gifts of qualifying business assets or gifts to trusts. In addition, gifts made shortly before death or without proper consideration of inheritance tax (IHT) rules may still give rise to IHT liabilities, reducing the effectiveness of the planning.

2. Employment‑Related Securities (ERS)

Where shares are gifted to an employee or director, or to someone connected with them, the shares may be classified as employment‑related securities. This can fundamentally change the tax outcome. Instead of CGT, the value of the shares (or the increase in value) may be treated as employment income and subject to income tax and potentially National Insurance contributions, based on the market value of the shares at the time of the gift. There may also be ongoing reporting obligations, including annual ERS filings with HMRC. These rules are often overlooked and can significantly increase the cost and complexity of a share gift.

3. Loss of Future Tax Reliefs

Gifting shares too early can result in the loss of valuable future tax reliefs. For example, the donor may lose access to Business Asset Disposal Relief (BADR) on a later sale, or the opportunity for a capital gains tax uplift on death (where assets held at death are generally rebased to market value).

In some cases, waiting to gift shares until closer to a sale or restructuring could produce a significantly better overall tax outcome, timing is therefore critical.

4. Gifting of Shares to Trusts

Gifting shares to a trust can be attractive from a succession and asset‑protection perspective, but it introduces additional complexity. Depending on the value of the shares and the type of trust, an immediate inheritance tax charge may arise at 20% on the value transferred above the available nil‑rate band. There may also be CGT consequences unless hold‑over relief is available and claimed.

In addition, once shares are held in trust, future decisions relating to the company (such as variations of share rights, dividends or exits) will need to take into account the interests of the trustees and beneficiaries. Ongoing trust compliance, reporting and potential ten‑year and exit charges for IHT purposes should also be considered.

5. Valuation and Documentation Issues

Private company shares can be difficult to value. HMRC may challenge valuations, particularly where gifts are made to connected persons or trusts. Inadequate valuation evidence can lead to disputed tax liabilities, penalties and professional costs.

In addition, company articles, shareholder agreements and statutory registers must be carefully reviewed. Pre‑emption rights, consent requirements or transfer restrictions can invalidate or complicate what appears to be a simple gift.

Final Thoughts

Gifting shares is a powerful planning tool, but it is not without risk. Tax exposure, ERS rules and missed future reliefs can all undermine the intended benefit of the gift. Obtaining advice before transferring shares is essential to ensure the transaction achieves its objectives and avoids costly surprises later on.

If you require any assistance, guidance or advice, please contact Manjot Shokar.