Giving shares in the family company to a spouse or child: the tax questions to settle before the register is changed
Moving shares to a spouse, a son or a daughter is usually done for good reasons: fairness, succession, or sharing the income. The tax code treats the gift as a sale at market value, measures it differently for inheritance tax, and in some cases still taxes the dividends on the person who gave the shares away. Here are the questions to settle first, an illustrative example, and the paperwork that follows.
A gift is a disposal at market value
There is no such thing as a tax-free transfer of shares merely because no money changes hands. A gift is a disposal for capital gains tax, and because a spouse, a child and other close relatives are connected persons under section 286 of the Taxation of Chargeable Gains Act 1992, sections 17 and 18 treat the transfer as made at market value. The giver is taxed on the difference between that value and their base cost, at 18 or 24 per cent for 2026/27 after the annual exempt amount of GBP 3,000, with no sale proceeds from which to pay it. What happens next depends on who receives the shares and on what the company does.
To a spouse or civil partner: no gain, but watch the dividends
Between spouses or civil partners who are living together, section 58 treats the transfer as made at no gain and no loss, so no capital gains tax arises and the recipient takes over the giver's base cost. For disposals since 6 April 2023, the same treatment continues after separation until the end of the third tax year after the year in which the couple stop living together, or the date of divorce or dissolution if earlier, and without that time limit for transfers made under a formal divorce agreement or court order. For inheritance tax, gifts between spouses are generally exempt. The question that needs care is income tax. The settlements rules in section 624 of the Income Tax (Trading and Other Income) Act 2005 can tax dividends on the spouse who gave the shares away. Section 626 excludes an outright gift between spouses, which is why the House of Lords found for the taxpayers in Jones v Garnett [2007] UKHL 35, the Arctic Systems case. The exclusion fails if the gift is not outright, for instance because the giver keeps a right to the income, or if the shares are wholly or substantially a right to income. A class of shares carrying dividends but no votes and no rights to capital is the classic example of property that risks failing that test.
To a child: a capital gains tax bill with no cash attached
A gift to an adult child is a disposal at market value with no spouse treatment. Relief is available only through gift holdover under section 165, which lets the gain be held over into the child's base cost if giver and child both claim it. It applies to shares in an unlisted trading company or in the holding company of a trading group. A company whose business is letting property is not a trading company, so its shares do not qualify, and the giver pays the tax. Where the company trades but also holds investments, the relief can be restricted in proportion. For a child under 18 who is unmarried and not in a civil partnership, section 629 of the 2005 Act treats dividends arising from a parent's gift as the parent's income, unless the total from that parent is GBP 100 or less in the year. Shares given to a young child are, for income tax, still the parent's shares.
Two taxes, two different values
Capital gains tax values what the recipient receives. A 25 per cent holding in a private company carries no control, and a valuer will discount it accordingly. Inheritance tax asks a different question: by how much has the giver's estate fallen? Section 3 of the Inheritance Tax Act 1984 measures the transfer of value as that loss. A parent who goes from 60 per cent to 40 per cent loses control of the company, and the fall in the value of the estate can be well above the discounted value of the 20 per cent given. A gift to an individual is a potentially exempt transfer, which becomes fully exempt if the giver survives seven years. Shares in an unlisted trading company can qualify for business property relief, from 6 April 2026 at 100 per cent within an allowance of GBP 1 million and at 50 per cent above it, though if the giver dies within seven years the relief generally depends on the recipient still holding the shares. Shares in a company whose business is wholly or mainly holding investments, which includes letting property, do not qualify at all.
An illustrative case
The figures are illustrative and the valuations are assumptions, not a view on any real company. A parent owns all the shares in a letting company worth GBP 800,000, with a base cost of GBP 1,000, and gives 25 per cent to an adult daughter. A valuer puts the 25 per cent holding, as a minority, at GBP 140,000. The gain is GBP 139,000. After the GBP 3,000 annual exempt amount, at 24 per cent, the capital gains tax is GBP 32,640, payable by 31 January after the end of the tax year, and there is no holdover because the company does not trade. For inheritance tax, the parent's holding falls from 100 per cent, worth GBP 800,000, to 75 per cent. If the retained holding is valued at GBP 540,000, the transfer of value is GBP 260,000, almost twice the figure used for capital gains tax. It is a potentially exempt transfer, so nothing is due if the parent survives seven years. Had the company been trading, a joint holdover claim could have deferred the GBP 32,640, leaving the daughter with a base cost reduced by the gain held over.
If the recipient works in the company
Where shares are made available to a director or employee by the employer, or by a person connected with the employer, the law treats them as acquired by reason of the employment, which brings the employment-related securities rules into play. Section 421B(3) of the Income Tax (Earnings and Pensions) Act 2003 makes an exception where the person making the shares available is an individual and does so in the normal course of their domestic, family or personal relationships. A parent passing shares to a child who also works in the business will often fit that exception, but it is a question of fact, and the reason for the gift is worth recording at the time. Shares handed over as a reward for work are a different matter.
The stamp duty and the paperwork
A gift of shares attracts no stamp duty, because there is no consideration. A transfer at a price, even a family price, attracts stamp duty at 0.5 per cent where the consideration is more than GBP 1,000. Check the articles of association for pre-emption rights and for any power of the directors to refuse to register a transfer, complete a stock transfer form, have the board approve the transfer and update the register of members. If the recipient will hold more than 25 per cent of the shares or votes, the register of persons with significant control changes too, and the next confirmation statement must show the new shareholdings.
Before anyone signs the transfer
Settle six questions. Who is receiving the shares, and does section 58, section 165 or neither apply? Does the company trade, and could its investments restrict any holdover? Will the dividends be taxed on the recipient, or caught by section 624 or section 629? What is the market value of the shares given, and what is the fall in the value of the giver's estate, which may be a very different figure? Does the recipient work in the company? And is there cash to pay any capital gains tax that arises, by the 31 January deadline? A transfer of shares takes one form and a minute to sign. Its tax consequences run for seven years on one side and for the life of the holding on the other.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.