The transfer of shares is very common within UK companies, and can be done by gift or sale to a new shareholder. Private limited companies don't tend to transfer shares so often, but sometimes it is needed to be done. Company shares are normally either allocated at the point of incorporatation, or can be transferred at a later date. So let's take a closer look at how shares are allocated and transferred:
Allocation at the point of incorporation
Part of forming your company involves the allocation of shares. This can be a very easy and straight forward process that can take a few minutes to decide on, or it can be a very lengthy and complex procedure that can involve months of negotiation. So let’s look at how something can be so simple in some cases and so complex in others. First of all, why do we even need shares? Company shares determine what share of the profits each person involved in the company gets. Shares also determine how much voting power a person has when it comes to something that needs to be decided by vote. How do we decide how many shares to issue and who gets what? Essentially, money talks; it can be as simple as that. If three people involved in a business all put an equal amount of money into a business at the point of start up, normally each person would get an equal amount of shares in the company. They would then all have an equal say in any votes that take place and all take an equal amount of the profits at the end of the year. Of course if you are starting the business on your own and all of the start-up capital has come from you, then you issue all of the shares to yourself, simple.
The amount of shares to issue each person is up to you. In the above example with three equal partners you could keep things very simple and just issue three shares, one each. So say the partners each put £100 into the start-up capital then the individual share would be worth £100.
A common method used by new companies is to value each share at £1 and then issue an amount of shares to each person equal to their investment. So in the above example, instead of issuing three shares worth £100 each, you would issue 300 shares valued at £1 each. The result at the end is the same, but it makes things easier if the investors are all putting in different amounts. For example, imagine the first investor is putting in £200 the second is contributing £70 and the third person is only putting in £30. You can avoid some complicated sums if you go with this method and issue 200 £1 shares to the first, 70 to the second and 30 £1 shares to the third investor.
Another method is to keep the amount of shares to either one hundred or one thousand. This method makes it easier to determine what percentage of the company is owned by any one person. Voting is made much clearer using this method.
Remember, the value of shares can go up or down depending on how well your company performs and in some cases shares can end up worthless. Complexity By now you may be starting to realise how complicated company shares can get if there are a lot of interested parties contributing money. There is no maximum amount of shares that can be issued and further shares can always be issued at a later date. The minimum amount of shares you must issue is one (1).
The value of shares also has no maximum so if you have issued yourself the one and only share in your company and your business goes on to become a multi-million-pound multinational, your one share will be worth the full value of your company. The minimum value of your shares is 0.0001 pence.
In the event that you have several people looking to put money into your business in return for company shares, you may need to seek legal assistance in order to work out exactly how many shares should be issued and in what proportions.
Consider the situation whereby the investors are putting more money in than you are but it will be you that is doing all the work to make the company a success. In this scenario it would not be fair to allocate too many shares to the investors. You have to be careful that you do not inadvertently give control of your company away. If you find yourself in this situation, legal advice is highly recommended. Using a good corporate lawyer will ensure that any agreements made regarding shares are legally binding and not open to any challenge.
The best scenario is that a fair arrangement is reached whereby the investors are happy with their share of the profits and the say that they have in company voting and that you are happy with the proposed structure.
Transferring Company Shares
There are numerous reasons why you might want to transfer shares between shareholders. Someone might leave the company and sell their shares on, or after trading for a while it becomes obvious that some shareholders are holding more than their fair share and a redistribution is required.
One of the most common reasons for transferring shares is tax efficiency.
Moving company shares into a pension fund or ISA is something that business owners consider when the tax bill on company profits has hit a certain level. It is not generally something that is done at the start of a new company.
Pension funds and ISAs have different rates and allowances when it comes to paying tax. When your company reaches a certain level of profit, it starts to make sense to look at transferring shares to another ‘vehicle’.
Transferring shares to a spouse or child is also something to consider as it can make good sense in terms of tax. Let’s look at a quick example of why transferring a portion of your shares to your spouse would benefit you:
Example. You’ve started your business and at the end of the first year, after all expenses (including your own wage of £11k per year*) you have made £30,000 profit. You are the sole shareholder so you get to keep the full £30k as a dividend… but wait! Tax! George Osbourne wants his cut and he has the power of the state behind him, you have to pay the man.
From the 6th of April 2016 you will have a personal allowance of £5000 (tax free) for dividends and then pay 7.5% on the rest. So in this scenario your tax bill is £1,875.00
Now consider the same example if you transfer half of the company shares to your spouse. So you each get £15,000 in dividends. You each benefit from that £5,000 tax free allowance and each pay 7.5% on the rest = (£750 each) £1,500.00 total - £375.00 saving.
You can also transfer shares to your children to take further advantage of that tax-free allowance but beware, the more you share out the less control you will have in votes (just because they’re family doesn’t mean they will necessarily behave the way you want in the boardroom) and the money awarded in dividends is the property of that shareholder. If you give your 18-year-old son 50% of your business’ shares, the dividend he gets at the end of the year is his property, not yours. If you try and use that money as your property it could be viewed as tax evasion by HMRC and you could find yourself in deep trouble.
*paying yourself £11k per year is standard practice for small business owners as it means you do not pay income tax due to the personal allowance for income tax and it means that you are classified as a basic-rate taxpayer.
The above example assumes that you and your spouse are on the basic rate of tax. Please seek the expert advice of a chartered accountant when dealing with tax matters as you can find yourself in serious trouble with HMRC if you get it wrong. Every person’s situation is different and the services of a chartered accountant is the best way for you ensure maximum tax efficiency without falling into the tax evasion category.
How do you go about transferring shares?
When it comes to transferring shares you must consult your company’s articles of association and the shareholder’s agreement. All shareholders must be consulted prior to any action being taken with regard to the sale or transfer of shares. There may be restrictions on this activity.
Any changes to the share structure of your company must be notified to Companies House.
The government’s Companies House website is brilliant: https://www.gov.uk/government/organisations/companies-house
It takes you step by step through the process of making changes to your company, including the sale and transfer of shares, enabling you to complete the process electronically or by printing off the forms and doing things the old fashioned way.
The process essentially involves completing a stock transfer form with the details of what transfer is taking place. The signatures of the involved parties are generally required and there is a fee (a duty) to pay if the value exceeds £1,000. You cannot do a series of smaller transactions to avoid this duty. The duty stands at 0.5% and rounded up to the nearest £5.
Example. If you transfer £4500 worth of shares, the duty will be £22.50, but you would pay £25 after it being rounded up to the nearest fiver.
Your company, the board of directors if you have one, decides on whether to approve the transfer and if approved the company updates its statutory register and notifies Companies House.