As the new UK tax year (the UK tax year is a period of 12 months running from 6 April to 5 April) has begun, the UK government has made some changes to the tax law framework. The purpose of this contribution is to illustrate the updated fiscal framework relating to the ownership and disposal of shares in a private limited company under English law.
The following provides a brief analysis of the taxes that a shareholder is most frequently required to pay, namely:
- Income tax
- Stamp duty
- Inheritance tax
- Capital gain tax
All references to tax rates, reliefs, tax bands, and allowances are updated and referred to the 2024/2025 UK tax year.
1) General notions on income tax
Every shareholder of a private limited company registered in England with Companies House is required to pay taxes on the dividend they receive.
HMRC consider any dividend received as part of the shareholder’s income and hence increasing their liability to income tax.
Taxable income is composed by the sum of all the earnings made in a tax year (Total Annual Income).
Every taxpayer has a tax-free personal allowance (£12,570 in the 2024/25 tax year and frozen until 2028). In other words, any individual whose Total Annual Income is below £12,570 is not required to pay any income tax.
Depending on the amount of the Total Annual Income, taxpayers are assigned to a specific tax band and the applicable tax rate is determined accordingly. Below are shown the thresholds that determine the above-mentioned tax bands:
- Personal Allowance: £12,570.00;
- Basic-rate tax: from £12,571.00 to £37,700.00;
- High-rate tax: from £37,701.00 to £125,139.00; and
- Additional-rate tax: from £125,140.00.
1.1) Dividend tax
Everyone gets a dividend tax-free allowance corresponding to £500 to be added to the above-mentioned Personal Allowance. This means that a shareholder whose Total Annual Income exceeds the Personal Allowance pays income dividend tax only on those dividends that exceeds the allowance of £500.
As mentioned above, the applicable tax rate is determined according to the tax band the shareholder is assigned to.
In April 2022, the dividend tax rates increased by 1.25%.
Here are the current rates:
- 8.75% for basic rate taxpayers;
- 33.75% for higher rate taxpayers; and
- 39.35% for additional rate taxpayers.
2) Stamp Duty-Purchase of shares
Most company shares are purchased electronically using the CREST system (CREST is a UK-based central securities depository that holds UK equities and UK gilts, as well as Irish equities and other international securities), while others are bought in the traditional way through paper stock transfer forms. Both incur into stamp duty.
The payable stamp duty depends on how the investor buy the shares as shown below:
- Purchase through paper stock transfer form. Stamp duty isset at 0.5% on trades over £1,000.
- Electronical purchase through the CREST system. Stamp duty is set at 0.5% of the value of any trade.
To conclude, it is essential to remember that stamp duty is not payable on:
- shares worth up to £50,000 transferred to an employee of the company that issued the transferred shares;
- a new issue of shares in a company;
- shares in an open-ended investment company, known as OEIC (type of investment fund domiciled in the United Kingdom that is structured as a company in its own right to invest in stocks and other securities);
- units in a unit trust;
- Exchange Traded Funds, known as ETFs (funds that trade on exchanges, generally tracking a specific index);
- foreign shares outside the UK; and
- gifts of shares.
3) Inheritance tax
In the event shares are transferred at the transferor’s death to the transferee by a will, inheritance tax might be due. It is essential to check whether the mortis causa transfer is exempted or not. Examples of exempted transfers are transfers between spouses and to charities.
If inheritance tax is due, the applicable tax rate is 40% and is applied over the market value of the transferred shares at the date of death.
3.1) Business Property Relief (BPR)
If the transfer of shares mortis causa is not exempted from the payment of Inheritance Tax, when calculating Inheritance Tax, it is essential to consider whether the Business Property Relief (BPR) is applicable. The BPR reduces the value of business property (which includes shares) and consequently the amount the taxpayer is required to pay. To qualify for relief, business assets must have been owned for at least two years prior to the transfer. Reductions vary depending on the type of asset.
In the specific case of the transfer of shares in an unlisted company (including private limited companies), the reduction is set at 100% of the value of the shares transferred. In other words, under English law, where the transfer relates to shares in an unlisted company, the value of the shares on which the 40% rate is applied, being reduced by 100%, is zero, so that no inheritance tax is due.
4) Capital gain tax
Each time a shareholder of a private limited company decides to sell their shares they might incur into capital gain tax (CGT) liability.
CGT is applied to profits actually made, meaning that the payable tax is based on the actual gain of the shareholder and not on the price the shares were sold for. In other words, shareholders are taxed on the amount resulting from the difference between the price they acquired the shares for and the price the shares were sold for.
In the 2024/2025 tax year:
- the CGT allowance is set at £3,000, meaning that profits below £3,000 are not taxed; and
- CGT is charged at the rate of either 10% or 18% for basic rate taxpayers, and at a rate of either 20% or 24% for higher or additional taxpayers.
Generally, no capital gain tax is due if:
- shares are gifted between spouses/civil partners or to a charity.
- there has been a disposal of:
- Shares contained in an Individual Savings Account (ISAs) or Personal Equity Plan (PEPs). Both PEPs and ISAs are investment schemes introduced by the UK government to encourage investment in UK companies;
- Shares in employer share incentive plans (SIPs), in other words, plans created by employers to incentivise their employees by granting them shares of their company;
- UK government gilts;
- Premium Bonds.
To conclude, it is essential to remember that tax rates are reviewed periodically and therefore it is always a good idea to seek advice whenever buying or selling shares. Overall, as outlined above in relation to Income Tax, there have been increases in recent years due to the specific economic situation that the UK is facing. For the time being, the increases do not seem to be a cause for concern and can be said to be within the normal range.
DISCLAIMER: This article merely provides general information and does not constitute legal advice of any kind from Macchi di Cellere Gangemi which assumes no liability whatsoever for the content and correctness of the newsletter. The author or your contact in the firm will be happy to answer any questions you may have.