Key considerations when buying or selling shares in a private limited company

Selling and buying shares in a private business limited company can be complex, and there are various legal obligations you need to fulfil. The process can be straightforward in most cases, but there are legal requirements and tax implications involved, which is why we would always recommend involving your accountant or corporate lawyer in the process.

To give you an idea of what is involved, we've written this guide to walk you through key points you should know before proceeding with a share transfer.

Do any share transfer restrictions apply?

First, understand what constraints apply to transferring your company's shares. The Companies Act 2006 requires share transfers to follow the terms defined in your company's articles of association.

Additionally, you may have a shareholders' agreement in place, which is a common way to document further or more complex rules on the rights of shareholders and the rules governing how shares may be bought and sold. This is standard practice for businesses seeking external investment.

Step one is to read through these documents and confirm that your proposed share transfer is allowable and legal.

What documents will you need to transfer shares?

You may need to draft three key documents to process a legal transfer of shares. One is legally required, and two are recommended.

Stock transfer form

This is a required document that records details of the buyer and seller and the transaction, including the amount being paid for the shares. In many cases, the form will need to be submitted to HMRC if stamp duty is applicable (covered later in this guide).

Depending on the nature of the transaction, your accountant or corporate lawyer will provide you with the relevant form to complete. In this accountancy practice, we'll prepare the correct form based on the details of the shares being transferred.

Share purchase agreement

It is common to create a share purchase agreement to document the details of a share transfer, especially if the buyer and seller (and sometimes the company) have negotiated any additional terms to apply to the transaction. However, in simple transfers, you may decide this is not worth producing.

Share certificate

The company may issue a share certificate to the new shareholder. This simply defines how many shares the shareholder owns and the type of shares held. The share certificate is evidence that the buyer legally owns the shares.

Stamp duty on transfer of shares

Stamp duty is a tax on the transfer of private company shares. It is paid by the buyer of the shares at a rate of 0.5% of the value of the share purchase transaction. Exceptions apply, the most common being if the transaction is for less than £1,000 or if transferring the shares to a spouse.

If an exemption applies, the stock transfer form can be presented to the company straight away for registration. If stamp duty does apply, it must be paid within 30 days of the transaction date, and HMRC will 'stamp' the submitted stock transfer form, which can then be presented to the company.

Director responsibilities for registering share transfers

You have a statutory obligation as a director to refuse or approve the transfer within two months of receiving the stock transfer form. If you do not do this within this timeframe, you can be subject to fines. If you refuse to approve the transfer, you must provide a valid reason for doing so.

Once a share transfer is approved, the company must:

1. Enter the new shareholder on its statutory shareholder register and issue a share certificate to the new owner of the shares within two months
2. Update its register of transfers within two months
3. Update its Persons of Significant Control ('PSC') register to Companies House within 14 days

Tax implications for seller or gifter of shares

Individuals selling or gifting shares are liable for capital gains tax on the change in market value of the shares they owned (see our post on valuing your business for more guidance on this topic). Exceptions to this include, if the shares are held in a tax-sheltered account, e.g. an ISA; the seller is eligible for tax reliefs, most commonly entrepreneurs' relief; or if transferring the shares to a spouse, civil partner or charity. The capital gains allowance in the UK is £12,300 for 2022/23, meaning you may not need to pay tax if your total capitals gains in the year are below this amount.

As a result, in almost all cases of a share transfer, a valuation of the business is required to determine the market value of the shares being transferred, even if the shares are being gifted.

If the seller is a corporate entity, it may be liable for corporation tax on its profit from the sale. If you are unsure of the tax implication of the sale, you should consult your accountant or a tax advisor.

Tax implications for buyer or receiver of shares

The buyer is liable for stamp duty as described above. They will also be liable to capital gains tax at a later date if the value of the shares changes from when they received their shares. If the shares were received from a spouse or civil partner, then the original share value to use to calculate the capital gain, is the amount the spouse paid for the shares.

Note, special rules apply if the share recipient is an employee or has some connection with the business transferring the shares.

Gifting shares to employees by employers

Employers need to be careful when considering gifting shares to employees because this area of tax is subject to complex anti-avoidance legislation from HMRC.

As a rule, when an employee receives shares from their employer, the employee is deemed to be in receipt of a benefit in kind which attracts income tax and national insurance.

As a result of these rules, it means that whenever such a gift is made from employer to employee, the business needs to be valued in a manner consistent with HMRC's accepted approaches. If you are considering gifting shares to an employee, make your accountant aware, as there are alternative approaches which can be more tax efficient, for example, EMI Share Options.

Share transfer summary

Let's assume that the shares can be transferred and that no restrictions apply to the share transfer being considered. You have confirmed that the share transaction is allowable based on the company's articles of association and shareholder agreements.

In this case, the summary of steps is:

1. The share seller signs the stock transfer form
2. If required, the buyer signs the stock transfer form as well
3. When stamp duty is payable, the form is sent to HMRC for stamping and stamp duty is paid
4. The transfer form is presented to the company
5. The directors approve or refuse the transfer and document their decision
6. The company updates its statutory registers, cancels share certificate(s) and issues new certificate(s)
7. Optionally, the transfer is confirmed to Companies House as part of a confirmation statement

What needs to happen as part of a share sale?

So, what are your responsibilities in the share transfer process?

Here is a summary of the actions typically taken by the respective parties to the transactions, as well as what your accountant or corporate lawyer may do for you in the process.