Changing who owns your company, or the types of shares it has, is a legal process first. Tax and accounting questions run alongside it. The main ones are what the shares are worth, who pays tax (if anyone), whether stamp duty applies, whether employment tax rules are triggered, what has to be filed, and how dividends will work afterwards.
This is not a do-it-yourself guide. The legal documents should be prepared by a solicitor. What follows sets out the points to think about before you start, so the legal, tax and accounting sides are dealt with together rather than one after another.
Why do owners change their share structure?
- Bringing in a business partner or key manager.
- Passing shares to a spouse, civil partner or the next generation.
- A shareholder leaving, retiring or being bought out.
- Bringing in outside investment.
- Creating different classes of shares, for example so that different shareholders can receive different dividends.
- Preparing for a sale or a new group structure.
Each of these involves different documents and different tax questions, so it helps to be clear about the aim before anything is drafted.
Which parts need a solicitor?
These are legal matters, and your solicitor should advise on them:
- whether your articles of association allow the change, and whether they need amending;
- shareholder and board approvals, and the resolutions needed;
- pre-emption rights, which may give existing shareholders the first option on new or transferred shares;
- the rights attached to each class of share: votes, dividends and what happens on a sale or winding up;
- a shareholders' agreement, particularly what happens if someone leaves, dies or falls out with the others;
- the transfer documents and updating the company's statutory registers;
- any buy-back of shares by the company, which has specific legal requirements.
Your accountant should be involved alongside the solicitor, not after them, because the way the documents are drafted affects the tax and the accounting.
What are the tax points?
The tax depends on who is giving or selling, who is receiving, the price and the reason. These are the points that most often matter.
Value. For capital gains tax, a gift or sale to a connected person, such as a relative, is generally treated as taking place at market value, whatever price is actually paid. So a valuation is often needed even when no money changes hands.
Spouses and civil partners. Transfers between spouses or civil partners who live together do not normally give rise to capital gains tax at the time. The receiving spouse takes on the original cost for when they later sell.
Gifts to others. Gifts to children or other family members are normally treated as a disposal at market value. Relief may be available to defer the gain on gifts of shares in a trading company, but it has conditions and must be claimed.
Employees and directors. If someone receives shares because of their job, and pays less than the shares are worth, the difference can be taxed as employment income. Shares acquired by employees and directors are also "employment-related securities", which the company must report to HMRC in an annual return by 6 July after the end of the tax year, including a nil return where there is nothing to report once a scheme is registered. Tax-advantaged schemes such as EMI options have their own rules and must be registered with HMRC. If the aim is to give a manager a stake, these should be looked at before anything is agreed.
Stamp duty. When existing shares are bought using a stock transfer form, stamp duty is usually payable at 0.5% if the price is over £1,000. It is not payable when shares are given for nothing or when someone subscribes for new shares issued by the company.
Dividends after the change. Different share classes can allow different dividends for different shareholders. They need to be set up properly, with rights set out in the articles and dividends declared correctly for each class. HMRC can challenge arrangements, particularly within families, where income is effectively diverted to someone else to reduce tax. That is a point for advice, not assumption.
Buying out a shareholder. If the company buys back a departing shareholder's shares, the payment may be taxed as income or as a capital gain depending on the circumstances. HMRC offers advance clearance for this.
What has to be filed at Companies House?
- New shares. If the company issues new shares, a return of allotment (form SH01) with an updated statement of capital must be filed within one month.
- People with significant control. If the change means someone becomes, or stops being, a person with significant control, broadly anyone holding more than 25% of the shares or voting rights, Companies House must be told within 14 days. People with significant control also now need to verify their identity with Companies House.
- Share transfers and shareholder details. Changes to shareholders and the statement of capital are also updated on the company's confirmation statement.
- Changes to the articles. Special resolutions and amended articles must be filed if the articles change.
The company's own registers, including the register of members, must also be updated. Your solicitor or company secretary will usually handle these.
What changes in the accounts?
- Share capital and, where shares are issued for more than their nominal value, share premium.
- Money received for new shares, or paid out in a buy-back, which has its own accounting rules.
- Board minutes and paperwork for dividends by class.
- Any director's loan account balances with people joining or leaving.
- If the change creates a group or brings in a holding company, a new structure to report. See When Does a Business Need a Holding Company? and Group Company Structures: When Do They Make Sense?
In what order should things happen?
- Be clear about what you want to achieve and why.
- Talk to your accountant and solicitor early, and ideally together.
- Get a valuation where one is needed.
- Check the tax position for everyone involved, including any clearances.
- Have the documents drafted and approved.
- Complete the change, pay any stamp duty and make the filings on time.
- Update the accounts, registers and dividend arrangements.
Most problems come from doing these steps in the wrong order, such as issuing shares to a manager before the employment tax position has been considered, or changing ownership shortly before a sale without thinking about how it affects the sale.
The short answer
Share changes are straightforward when they are planned and costly to unpick when they are not. Treat them as a legal change with tax and accounting consequences, get the right advisers involved before anything is signed, and keep the paperwork complete.
Groups & Company Structures explains how we help with ownership and structure changes, and Accounting covers the tax returns and accounts that follow.