October 9, 2026/
Gifting Shares to Family Members: Capital Gains Tax, Holdover Relief and Family...
Many family companies are incorporated with a simple share structure because, at the time, there seems little reason to do anything more complicated. One founder owns all the shares, retains complete control and expects to reconsider the position later.
The problem is that “later” often arrives after the company has become valuable.
At that point, changing the family company share structure can have consequences for Capital Gains Tax (CGT), Inheritance Tax (IHT), dividend taxation, Business Asset Disposal Relief (BADR), employment-related securities and succession planning.
With dividend tax rates having increased from 6 April 2026 and significant changes to Inheritance Tax Business Relief now in force, family business owners have good reason to review whether their shareholdings still reflect their long-term objectives.
There is no single share structure that is right for every family company. An effective structure should balance control, income extraction, tax efficiency, succession planning and the owner’s eventual exit from the business.
Holding 100% of the shares may provide simplicity and complete ownership, but it is not always necessary to retain day-to-day control. Depending on the company’s articles and shareholder arrangements, an owner may be able to introduce a spouse, civil partner or adult children as shareholders without surrendering effective control.
This can create valuable planning opportunities. However, shares should not be transferred simply to save dividend tax. The CGT, IHT, settlements legislation, employment-related securities rules and future BADR position should all be considered before ownership changes.
Share ownership determines considerably more than who receives dividends.
It can affect voting rights, entitlement to capital, proceeds on a future sale, succession arrangements and access to valuable tax reliefs. A share structure that worked when a business was worth £10,000 may therefore be inappropriate when that same company is worth £2 million.
For founders who want to retain strategic control while bringing family members into the business, it may be possible to separate economic participation from certain voting or dividend rights through carefully drafted share classes.
Different share classes — often referred to as alphabet shares — can provide flexibility, particularly around dividends. However, they need to be designed properly. The rights attached to each class, the company’s articles and the wider tax implications matter just as much as the number of shares issued.
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Bringing adult children or other family members into the ownership of a business can serve a genuine commercial purpose.
Where an adult child is actively involved in growing the company, for example, a shareholding may provide an incentive to remain in the business, recognise their contribution and begin the process of transferring ownership to the next generation.
The tax position must nevertheless be considered before a gift is made.
A gift of shares is generally treated as a disposal at market value for CGT purposes. However, Gift Hold-Over Relief may be available for qualifying shares in a trading company under section 165 TCGA 1992.
Where the relevant conditions are satisfied and the appropriate claim is made, the immediate CGT liability can effectively be deferred. Broadly, the deferred gain reduces the recipient’s acquisition cost for CGT purposes.
This can make lifetime transfers of family company shares considerably more practical, but the relief is not automatic. The nature of the company, the shares being transferred and the circumstances of the transaction should be checked before proceeding.
Transfers between spouses and civil partners who are living together are generally much simpler from a tax perspective.
For CGT purposes, qualifying transfers normally take place on a no gain, no loss basis. Transfers can also benefit from the IHT spouse or civil partner exemption, subject to the relevant statutory conditions.
This can make transferring shares between spouses an important part of family company tax planning, particularly where both spouses genuinely participate in the ownership of the business.
Care is still required where the objective is to redirect dividend income. The settlements legislation contains a specific exemption for outright gifts between spouses and civil partners, but the exemption can be restricted where the recipient does not receive a genuine interest in the underlying property.
The rights attached to the shares therefore matter. A structure designed purely to divert income while retaining the underlying economic ownership elsewhere can create unnecessary tax risk.
Inheritance Tax has become an increasingly important factor in family business succession planning.
From 6 April 2026, 100% Agricultural Property Relief and Business Relief is subject to a combined £2.5 million allowance for qualifying property. Qualifying value above that allowance generally receives 50% relief rather than 100%. Subject to the legislation, unused allowance can also potentially transfer between spouses or civil partners.
For owners of valuable family businesses, this materially changes the succession planning calculation.
Consider an owner with qualifying shares worth substantially more than £2.5 million. Previously, assuming all relevant conditions were met, 100% Business Relief could potentially have protected the entire qualifying shareholding. Under the rules applying from April 2026, qualifying value above the available 100% relief allowance may receive only 50% relief.
That makes the timing and structure of lifetime succession planning considerably more important.
An outright gift of shares from one individual to another will generally constitute a potentially exempt transfer for IHT purposes.
If the donor survives seven years after making the gift, it will normally fall outside their estate for IHT purposes. If the donor dies within seven years, the gift can become relevant again when calculating the IHT position.
This does not mean every business owner should immediately give shares to their children. The loss of ownership, control, future dividends and eventual sale proceeds must be weighed against any potential tax advantage.
Tax planning that leaves the founder financially exposed is rarely good planning.
This point is particularly important where children or other relatives also work for the company.
The employment-related securities legislation is deliberately broad. However, there is an exception where shares are made available by an individual in the normal course of a domestic, family or personal relationship.
For example, a parent may transfer shares in a family company to children because they are family members, even where those children also happen to work in the business.
But the exemption should not simply be assumed.
The underlying facts matter. If the shares are really being transferred as a reward for employment or as an incentive for services, rather than because of the family relationship, the employment-related securities rules may apply.
The commercial and family reasons for the transfer should therefore be established and documented before the transaction takes place.
A family company share structure should also be reviewed with a future sale in mind.
Business Asset Disposal Relief (BADR) can reduce the CGT payable on qualifying business disposals. For qualifying disposals from 6 April 2026, the BADR rate is 18%.
For non-EMI shares, a shareholder generally needs the company to be their personal company for at least two years before disposal. Among other conditions, they must normally:
The company must also satisfy the relevant trading requirements.
This makes careless changes to share capital potentially expensive.
Introducing new shareholders or new classes of shares can alter percentages and economic rights. A founder who expects to qualify for BADR should therefore check the position before issuing or transferring shares rather than discovering shortly before a sale that the required conditions have not been satisfied throughout the relevant two-year period.
Particular care is needed where a company has several classes of ordinary shares. Shares with limited economic rights may still form part of the company’s ordinary share capital and can affect the percentage tests for other shareholders.
Dividends remain one of the main reasons family business owners review their share structures.
From 6 April 2026, dividend income above the available allowances is taxed at:
The dividend allowance remains £500.
Where several adult family members genuinely own shares, there may therefore be opportunities to distribute profits across shareholders whose overall tax positions differ.
But the principle is not as simple as “give your spouse shares and save tax”.
The ownership must be genuine, the shares must carry appropriate rights and the settlements legislation must be considered.
Different classes of ordinary shares can provide a family company with greater flexibility over dividends.
For example, a company might have A, B and C ordinary shares held by different family members. Subject to the company’s articles, company law requirements and the rights attached to each class, this may allow different dividends to be declared on different classes.
However, alphabet shares should not be treated as a mechanical tax-saving device.
The settlements legislation, employment-related securities provisions, share rights, dividend documentation and commercial rationale all need to be considered. Poorly constructed arrangements can attract HMRC scrutiny.
For transfers between spouses or civil partners, particular attention should be paid to whether the recipient receives genuine ownership rights rather than merely a right to dividend income.
The distinction between minor and adult children is important.
Where a parent gives assets to an unmarried minor child and the resulting income exceeds the statutory £100 threshold, the parental settlements rules can treat that income as the parent’s for Income Tax purposes.
This means that simply giving shares to a young child is generally not an effective way of shifting substantial dividend income away from the parent.
The position can be different for adult children. Where an adult child genuinely owns the shares, dividends will generally be assessed according to their own tax position, subject to the wider anti-avoidance and employment-related securities rules where relevant.
For families wanting to transfer economic value while retaining greater control over when beneficiaries receive it, trust planning may sometimes be worth considering. However, trusts have their own IHT, CGT and Income Tax consequences and should not be established purely as a dividend planning exercise without detailed advice.
It should not automatically be assumed that dividends are always the most tax-efficient method of extracting profits.
The correct comparison depends on corporation tax, dividend tax, Income Tax, employer and employee National Insurance, available allowances and the individual’s wider income.
For working family members, salary or bonuses may sometimes produce a better overall result because qualifying remuneration is normally deductible when calculating the company’s taxable profits, whereas dividends are paid from post-tax profits.
For family shareholders who do not work in the business, remuneration may be difficult to justify commercially and for corporation tax purposes. Genuine dividends on genuine shareholdings may therefore be more appropriate.
The calculation should be performed using the actual circumstances rather than relying on historic assumptions about salary versus dividends.
Tax is only one part of a family company share structure.
Giving somebody shares means giving them an ownership interest. Depending on the rights attached to those shares, that can include voting rights, dividends, capital rights and a share of future sale proceeds.
Relationships also change.
A family member who is cooperative today may later divorce, experience financial difficulties, leave the business or disagree with the founder over dividends, investment or the eventual sale of the company.
Shares should therefore be transferred because the ownership structure makes commercial and family sense — not simply because a spreadsheet shows an immediate tax saving.
A carefully drafted shareholders’ agreement and appropriate articles of association can help establish how decisions are made, what happens when someone wants to leave, how shares can be transferred and how disputes are handled.company’s
The biggest mistake with family company share structures is often considering one tax in isolation.
A proposal might reduce dividend tax but weaken a shareholder’s BADR position. A lifetime gift might improve succession planning but leave the founder without sufficient income or capital. A new class of shares might provide dividend flexibility but create settlements legislation or employment-related securities issues.
A better approach is to work backwards from the family’s commercial objectives.
Start with four questions: Who needs control? Who should receive income? Who should ultimately own the business? What is likely to happen if the company is sold?
Only then should the tax consequences be modelled.
For established businesses in particular, the share structure should be reviewed before the company becomes significantly more valuable, before family members are brought into ownership, and well before a proposed sale. Once substantial value has accumulated, restructuring can become more complicated and potentially more expensive.
A well-designed family company share structure can do much more than determine who receives dividends. It can help preserve control, give family members a genuine stake in the business, support succession planning, protect access to valuable tax reliefs and establish how wealth will eventually pass to the next generation.
But there is no universal structure.
The right solution depends on the value and nature of the company, the shareholders’ involvement, future income requirements, family relationships, IHT exposure and whether an eventual sale is likely.
With higher dividend tax rates and the new Business Relief restrictions applying from April 2026, family company owners should consider whether arrangements put in place years ago still meet their commercial and tax objectives.
If your company has grown significantly since incorporation, you are considering bringing a spouse or adult children into the business, or you want to restructure shares for dividends, succession planning or a future sale, the tax implications should be assessed before shares are issued, gifted or transferred.
Naail & Co can review your existing share structure, consider the CGT, IHT, dividend tax, BADR and employment-related securities implications, and advise on an appropriate structure based on your commercial and family objectives.
Get in touch with Naail & Co to book your free initial consultation.
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A family company share structure determines who owns the company and the voting, dividend and capital rights attached to their shares. A well-planned structure can help business owners retain control while introducing a spouse, civil partner or adult children as shareholders. It can also affect dividend tax planning, Capital Gains Tax (CGT), Inheritance Tax (IHT), Business Asset Disposal Relief (BADR) and succession planning.
A family company share structure can provide legitimate tax-planning opportunities by allocating genuine ownership between family members. This may allow dividends to be received by different shareholders according to their individual tax positions while supporting longer-term succession planning. However, HMRC’s settlements legislation, employment-related securities rules, CGT and IHT consequences must be considered before shares are issued, gifted or transferred.
You should review your family company share structure before transferring shares, introducing family members, changing share classes, paying different dividends or preparing the business for succession or sale. An early review is particularly important because BADR generally requires qualifying conditions to be met for at least two years before disposal. Reviewing the structure after a sale has been agreed may leave limited scope to correct tax problems.
Yes, shares in a family company can generally be gifted to a spouse, civil partner or children, but the tax treatment depends on the recipient and circumstances. Transfers between spouses or civil partners living together are normally made on a CGT no gain, no loss basis. Gifts to adult children can trigger CGT at market value, although Gift Hold-Over Relief may defer the gain where the statutory conditions are satisfied.
No, different share classes are not essential, but they can provide useful flexibility where family shareholders require different voting, dividend or capital rights. Alphabet shares, such as A, B and C ordinary shares, can sometimes allow different dividends to be declared between shareholders. The company’s articles, settlements legislation, employment-related securities rules and shareholders’ economic rights should be reviewed carefully before introducing multiple share classes.
A family company share structure can directly affect whether shareholders qualify for Business Asset Disposal Relief (BADR) when the business is sold. For most non-EMI shares, a shareholder must satisfy conditions including the relevant 5% ordinary share capital, voting and economic interest tests, normally throughout the two years before disposal. Issuing additional shares or creating new share classes can unintentionally dilute a shareholder below these thresholds.
There is no fixed tax saving because the result depends on each shareholder’s income, tax band, share rights and dividends received. From 6 April 2026, dividend income above available allowances is generally taxed at 10.75%, 35.75% or 39.35%, depending on the taxpayer’s band. Genuine family share ownership can therefore produce tax efficiencies, but arrangements designed simply to divert income may fall within HMRC’s settlements legislation.
Yes, but the tax treatment differs significantly between minor and adult children. Where shares are gifted by a parent to an unmarried minor child, the parental settlements rules can attribute income exceeding the relevant £100 threshold back to the parent. Adult children who genuinely own shares are generally taxed on their own dividends, although CGT, IHT and employment-related securities implications should be considered before transferring shares.
The main risks include unexpected CGT on share transfers, loss of BADR eligibility, settlements legislation applying to dividends, employment-related securities charges and unintended IHT consequences. Another common mistake is concentrating solely on immediate dividend tax savings while overlooking voting control, capital rights and future sale proceeds. Share rights, valuations, company articles and relevant tax elections should therefore be reviewed before, rather than after, restructuring.
Start by defining who should control the company, receive dividends, participate in future growth and ultimately own or sell the business. A tax adviser can then assess the existing shares and model the CGT, IHT, BADR, dividend and employment-related securities consequences of proposed changes. Implementation may require share transfers or new share classes, updated articles, shareholder resolutions, Companies House filings, tax elections and appropriate legal documentation.
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