How can I pass on shares to my children?
We explain the gifting rules and the tax implications
Passing on investments to children can be a great way of getting them interested in investing, and helping them to learn about how financial markets work.
However, it’s worth noting that shares can be a high-risk investment, as your money is based on one company’s fortunes, rather than spread across a number of investments. Because of this, you may be better off selling any shares you plan to gift and investing the money into a more diversified fund for your children or grandchildren.
Occasionally some families may have emotional attachment to certain company shares and want to keep them in the family, while others may just think the shares represent a good investment for their offspring.
It’s also the case that if you’re passing on the shares to a child the money will remain invested for a long period of time, meaning there is time to ride out the highs and lows of the market.
CAPITAL GAINS TAX IMPLICATIONS
If you are gifting the shares there are a number of points to consider. Unlike transfers to spouses, which are free of capital gains tax, any shares handed to children will be classed as a disposal for capital gains tax purposes. This means that you could be handed a tax bill for passing the shares on.
You would need to calculate any gain between the value of the shares when you bought them and their market value when you transfer them to your children.
If this is above your annual capital gains allowance of £11,700, or if you’ve already used this tax-free limit this tax year, you’ll pay 10% or 20%, depending on your income.
If you’re transferring a large number of shares, which have seen a hefty gain, and so are likely to face a large tax bill you could split the transfer of the shares up across a few tax years, to make use of multiple years of your capital gains tax allowance.
If you are gifting the shares there are a number of points to consider. Unlike transfers to spouses, which are free of capital gains tax, any shares handed to children will be classed as a disposal for capital gains tax purposes
INHERITANCE TAX IMPLICATIONS
You also need to consider inheritance tax as the shares will be counted as a gift. If you die within seven years of passing on the shares your estate may have to pay inheritance tax, at up to 40%, on the value of the shares – depending on whether your estate is above the IHT nil rate band.
The rate at which IHT is paid depends on how long before your death you gifted the shares.
However, every individual can gift up to £3,000 in a year free of inheritance tax (so £6,000 for a couple). You can use this annual gifting exemption to pass on the shares without the seven-year rule applying. If you haven’t used the previous year’s gifting allowance you can use double in one year, so £12,000 for a couple.
If you are a parent gifting shares to your child and the shares generate dividends you also need to be mindful of how much income they are generating.
Children can earn up to £100 a year free of income tax, but anything over this amount is taxed at the parent’s marginal rate. This limit doesn’t apply if the shares have been gifted by grandparents, other relatives or friends.
To avoid this income tax and any future capital gains tax, it would be best to transfer the shares into a Junior ISA in the child’s name, where it can grow free of tax. However, contributions to Junior ISAs must be made in cash, so you would need to sell the shares and then re-buy them within the ISA.
The annual limit on a Junior ISA is £4,260, so if the value of shares is higher than this amount you will need to do this effective transfer over a number of tax years.
With Junior ISAs, one thing to consider is that when the child reaches the age of 18 they are in control of the money and can decide what to do with it, so they could sell the shares at this point.
THE BENEFITS OF TRUSTS
Trusts could be an alternative to using a Junior ISA. One option is a bare trust, where the assets automatically become the trustee’s when they reach the age of 18 and over (or 16 and over in Scotland).
A bare trust could be set up by the grandparents and the shares transferred into that wrapper. If the bare trust is set up by a parent, they will still be subject to the income limit, meaning the parent will pay income tax on any dividends generated above that £100 limit. However, if it is set up by a grandparent this rule is avoided.