Table of Contents
Gifting shares involves giving shares in your company to others without expecting anything in return. It can be an effective way to reward key employees or bring friends, family members and other third parties into your startup business. The legal and tax implications of gifting shares can be complex for founders. Getting it wrong can result in unpredicted tax liabilities, legal disputes, or loss of control over your business. This article will explain the key legal considerations associated with gifting shares.
1. Understanding the Legal Implications
When gifting shares in your startup, the first step is to understand the legal implications of this process. Shares represent portions of ownership in your company, so you must thoroughly consider and document any transfer of shares. You must also ensure that any share gifting complies with the terms of any existing shareholder agreements.
The following table outlines several critical legal considerations that gifting shares involves.
| Legal Consideration | Explanation |
| Shareholders’ agreement | If you have a shareholders’ agreement, you should review it before gifting shares. This agreement may contain processes or restrictions on transferring shares, such as requiring the consent of other shareholders. |
| Articles of association | Your company’s articles of association may also impose restrictions on share transfers or specify particular procedures you must follow. As with the shareholders’ agreement, you should understand the implications of any relevant procedures or rules to ensure compliance. |
| Directors’ approval | In some cases, your company’s board of directors may need to approve the transfer of shares. You should make sure that you follow any necessary board-related procedures to avoid disputes later on. |
Ensuring that your actions comply with your company’s existing documents and procedures is essential for a smooth share transfer. Compliance with these will also mitigate the risk of potential legal disputes arising from your gifting.
2. Documentation and Reporting
HMRC Reporting obligations arise from gifting shares. It is best practice to seek professional advice to understand these requirements. For example, if you gift shares to an employee, you and your employee must meet the relevant reporting obligations. The recipient must pay the applicable taxes and report the gift on their tax return if necessary.
Reporting obligations can vary depending on who you gift shares to or if, for example, you gift shares to employees through a tax-advantaged share scheme.
Continue reading this article below the formCall 0808 196 8584 for urgent assistance.
Otherwise, complete this form and we will contact you within one business day.
3. Tax Implications of Gifting Shares
Gifting shares can have tax implications. These can vary depending on:
- the value of the shares;
- who you are gifting the shares to; and
- the recipient’s circumstances.
For example, if you gift shares to your spouse, capital gains tax will not be applicable. However, if you gift shares to employees, they will probably need to pay income tax and national insurance contributions. If that employee sells or transfers their gifted shares, they will pay capital gains tax on their gains.
It is crucial to consider these implications before proceeding with the transfer. You should also seek professional financial advice to fully understand your obligations and potential tax liabilities.
4. Maintaining Control Over Your Business
Loss of control is a crucial concern when gifting shares. By gifting shares, you give away a portion of ownership in your company. When gifting, this portion tends to be small. However, it is crucial to consider the implications of ownership dilution. Over-dilution could impact your voting rights and control and that of other shareholders.
One strategy to maintain control is issuing different classes of company shares when gifting. Non-voting shares allow the recipients to benefit from dividends and capital growth without the gift affecting your decision-making power. Another strategy is to place restrictions within the shareholders’ agreement on the rights of new stakeholders. You might limit their ability to vote on specific matters or sell their shares to third parties.
You can also impose conditions on the gift, such as requiring the recipient to return the shares if they do not meet specific criteria. For example, you might require employees to return their shares if they leave the business.
This guide aims to introduce founders to the UK startup market. It provides extensive insights and practical advice on essential steps for launching your startup in the UK.
Key Takeaways
Gifting shares can be a great way to reward individuals, incentivise employees, and credit family members for their support. However, this process has legal and financial implications. As a founder, it is essential to be aware of the following when gifting shares:
- the legal implications;
- HMRC reporting requirements;
- tax liabilities; and
- the implications of ownership dilution and how to maintain your and other key stakeholders’ voting rights and control.
Before gifting shares, it is a good idea to seek professional advice. This can help to ensure you correctly mitigate risks and understand the tax implications.
If you require legal advice about gifting shares, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Gifting shares involves giving shares in your company to others without expecting anything in return.
Yes, you can issue non-voting shares or place conditions in the shareholders’ agreement to limit the recipient’s control within your company.
We appreciate your feedback – your submission has been successfully received.
