Transfer of shares to family

You can transfer up to £3,000 worth of assets without any tax implications in any tax year. You just complete the share tranfer form and record it in the statutory books and in the next Annual Return of the company. Of course the hard bit is working out the market value of the shares. They might have apar value of £1 but be worth more or less. Best to ask for professional advice on this aspect.

Valuing a company is at best an inexact process. Because the transactions are not at arm's length, you could find that the HMRC take an interest in the values, and you end up haggling with their Share Valuation Division. There will actually be different valuations for different taxes - seriously.

The transfer of shares to family members, or anybody else for that matter, involves considering a number of points. From a tax point of view, Capital Gains Tax, Inheritance Tax, possibly Income Tax if the transferees are employed by the company, Stamp Duty could all be relevant. Over and above that, you may well be advised to consider an agreement between the shareholders, particularly if you don't already have one. If you are giving shares to somebody who works in the business, what happens if they decide that they want to do something else? Will they hold on to the shares, which might screw up any dividend payment policy that you have, or can you insist that they are recovered and passed to other working shareholders?

It is almost never as straightforward as people like to think, and if you try to do this without advice covering all relevant aspects, you could end up with problems that you didn't think about.

I don't normally post "see an accountant" as an automatic response, because there are many things that people can do for themselves, but in this case I believe that it's the correct thing to do.

To say that valuing a company is inexact for tax purposes is an understatement and there are indeed several methods. The main thing is to decide on one which suits your kind of business and which you can justify to HMRC.

I do agree with David that you need to see an accountant, but one who understands your business and the purpose of the valuation - which probably rules out most of them.

Probably sensible to touch base with HMRC and see what they feel comfortable with.

Any valuation will be based on the expected sustainable level of future profits. Historic profits may well need to be revised if the level of remuneration for directors is different from what would be paid to competent but unconnected managers. In the past owner-directors typically paid themselves more than the market rate, but in recent years they have typically paid themselves less.

Eg a company turns in a profit of £100,000. However, the director's salary is only £6,000 and a manager would have to be paid £40,000 to do the same work. The "real" profit is only about £62,000, allowing for employer NIC. It's normal to look at three years trading with some kind of weighting to later years. Future profits will depend on how much the business depends on the current directors: if it won't work without them, then it's not worth much. Current market conditions can also adversely affect a valuation.

Assets may be a consideration for controlling or other substantial shareholdings, but not so relevant for small holdings.

Small shareholdings may be valued on a yield basis, and again if there has been a policy of excess dividends in past years that would need to be taken into consideration. It's normal to apply a discount, sometimes considerable, to small shareholdings. At the end of the day a 5% shareholding in a private company doesn't have any influence and may even be impossible to sell.

As I've said, the valuations for different taxes will be different. For example, if a 55% shareholder gifts 10%,for Capital Gains Tax you might value a 10% holding. For Inheritance Tax you value the existing controlling 55% holding and the residual 45%, and the value of the gift is the difference between the two - that will usually be much more than the 10% on its own.

Ultimately there is only one real measure of value - the price that a willing buyer will pay a willing seller. Without that it becomes a theoretical and highly subjective exercise. Ten different valuers might give you 20 different values!

You also need to consider whether the company qualifies as a trading company. Even if it does trade, that's not automatic if it holds excessive cash reserves or investment properties. I have a client with a net asset value (before property revaluation) of £400k and with cash in bank of £512k. I think that there is a real danger of them not being treated as a trading company, which could be very, very expensive in terms of lost reliefs for IHT in particular, and have been nagging them to do something about it. However, they quite like their £500k bank balance (who wouldn't!) and are reluctant to pay the personal taxes to remove it.

And that's a brief summary of what's involved.

Did you start off by saying it was simple?