Gifting shares to the next generation

Following the prospective IHT changes surrounding Business Relief (BR), some families may now decide the time has come to hand over the baton to the next generation.

But what are the tax consequences of doing so? 

Capital Gains Tax (CGT)

Gifting shares in the family business has a CGT consequence as the gift is deemed to take place at 'open market value' and in most cases, the market value will not be known. The open market value is the estimated value of the shares if the transaction took place between a willing buyer and willing seller. Tax would then be payable on the gain, which is the difference between the ‘base cost’ of the gifted shares and their value. In some cases this can create a 'dry tax charge' which means tax becomes payable even though no money changes hands.

Gift Hold-Over Relief

Fortunately, there is a tax relief (Gift Holdover Relief) available that avoids the dry tax charge in certain circumstances. This applies where the gifted shares are in an unquoted trading company. In essence this means the capital gain is deferred until the donee disposes of the shares at a future date. The majority of family businesses will be unquoted, and this makes the valuation of the shares more complicated and can require the cost of paying a professional specialist to carry- out the valuation. However, costs of valuation can be avoided in the circumstance that the donor is allowed to 'hold-over' the capital gain.

To claim the relief the company’s main activities must be trading, so this would rule out residential buy-to-let property or other investment companies.

Business Asset Disposal Relief

In some cases, the donor may not want to holdover the capital gain if the gain is eligible for Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) at the reduced tax rate of 14% (increasing to 18% in April 2026). Claiming this relief (and paying the tax) would uplift the base cost of the donee to the open market value but it would then be necessary to value the shares. This is often a red flag to HMRC to open an enquiry and challenge the valuation.

Please do note that:

• each individual’s lifetime allowance for this relief is capped at £1,000,000.

• the tax rates are going up in the next couple of years, so you may want to think about timing were you to take advantage of the lower rates.

Employment Related Securities rules

Another potential issue on gifting shares to an employee is the risk HMRC may treat the value of the shares as earnings under the Employment Related Securities rules. There is however an exemption available for family and personal relationships when this is in the normal course of a domestic or personal relationship.

For more information on the issues raised in this update or to discuss your individual circumstances in detail, please get it touch with your usual Crowe contact.