Passing a Business to Family: Tax and Planning Considerations

In short: Passing a business to family usually means transferring shares in your limited company, and a gift of shares is taxed much like a sale at market value. Capital Gains Tax can arise with no money changing hands unless gift relief is claimed, and Inheritance Tax depends on business relief, which is no longer unlimited, and on whether you survive the gift by seven years.

This article covers the tax side of a family handover. Choosing and preparing a successor is a separate piece of work, set out in our guide to succession planning for business owners, and the wider routes out of a business are covered in our complete guide to business exit planning. Everything here assumes a UK limited company with shares to pass on.

What taxes apply when you pass a business to family?

Two taxes do most of the work, and they look at the same transfer from different angles. Capital Gains Tax looks at the person giving the shares and asks how much their value has grown since they were acquired. Inheritance Tax looks at the value leaving that person's estate, either now or on death.

Each has its own reliefs and conditions, and a transfer can qualify fully for one while failing the other. Income tax can also appear at the edges, particularly where shares go to younger family members or to someone who works in the company.

Which way of passing on shares raises which tax questions?

The route you choose decides which questions need answering. None of these is automatically better than the others.

Does gifting shares to your children trigger Capital Gains Tax?

It can. Family members are connected persons for tax, so when shares pass between them HMRC uses market value in place of whatever was actually paid. A gift is treated as if you had sold the shares at their full value, and any growth since you acquired them becomes a chargeable gain.

For a founder who subscribed for shares at formation, that gain can be close to the whole value of the holding, and it would fall due on a transaction that produced no cash to pay it.

What is gift relief on shares?

Gift relief, also called hold over relief, lets the gain pass to the person receiving the shares instead of being taxed now. Their base cost is reduced by the gain held over, so the tax is deferred rather than removed, and it becomes payable when they sell. Both the giver and the recipient have to sign the claim, as HMRC explains in its helpsheet on relief for gifts.

For shares, the company must be a trading company or the holding company of a trading group, and the shares must be unlisted or the company must be your personal company. The recipient must be UK resident, and the relief can be clawed back if they leave the UK within a set period. Relief is not available where the shares are given to a company.

One restriction catches many profitable companies. Where the company holds investments or property that are not used in its trade, part of the gain may not qualify, even though the company passes the trading test overall. How much is lost depends on the balance sheet on the day of the gift, which is why the timing of a gift matters as much as the decision to make one.

What about gifts between spouses and civil partners?

Transfers between spouses and civil partners who live together are, in most cases, outside both taxes. They are a common first step in a wider plan, but moving shares between a couple can change who qualifies for other reliefs later, so they are rarely neutral in practice.

If shares in your company are likely to move within the family in the next few years, our tax advisory team can check how gift relief and business relief apply to your company before anything is signed.

How does Inheritance Tax apply to shares you give away?

A gift of shares to another individual is a potentially exempt transfer. There is no Inheritance Tax when the gift is made, and if you survive it by seven years it falls outside your estate altogether. If you die within that period, the gift is brought back into account and can use up allowances that would otherwise have sheltered the rest of the estate.

Business relief, still widely called business property relief, can reduce the value of qualifying shares in an unlisted trading company for Inheritance Tax. The shares normally need to have been owned for two years before they qualify.

There is a condition that applies specifically to lifetime gifts. If you die within seven years, relief on the gift is usually only available if the family member still owns the shares, or qualifying replacement property, and the company still qualifies at that point. A son who sells his shares to fund a house, or a company that drifts into holding investments, can turn a gift that looked fully relieved into a taxable one years after the event.

Continuing to benefit from what you have given away is a separate risk. If you keep enjoying the income or value the shares produce, the gift can be ignored for Inheritance Tax. Where the owner keeps working in the business after a gift, the terms of that arrangement need checking with this in mind.

What changed with business relief for family companies?

Business relief used to be unlimited for qualifying trading company shares, so many family companies passed between generations with no Inheritance Tax at all. Since the reforms took effect in April 2026 that is no longer the case. Full relief now applies only up to a set allowance per person, shared with agricultural property relief, and qualifying value above that allowance receives relief at half the full rate. The detail is in the government's policy paper on the changes.

Several features of the new rules matter to family companies. Any unused allowance can pass to a surviving spouse or civil partner. Lifetime gifts made in the seven years before death count against the allowance, so gifting does not simply sidestep the cap. Trusts holding qualifying shares have an allowance of their own, with separate rules. Where tax is due on qualifying business property, it can be paid in instalments over a number of years without interest, which helps with cash but does not reduce the bill.

The rules also changed more than once between announcement and implementation, and plenty of guidance online still describes versions that never came into force. Any plan drawn up before the final rules were confirmed is worth checking against the law as it now stands.

Is it better to gift shares now or leave them in a will?

There is no general answer, because each option wins on a different tax.

Shares passed on death do not trigger Capital Gains Tax, and the family member inherits them at their market value at that date. Growth during your lifetime is effectively wiped out for Capital Gains Tax purposes. Shares gifted during your lifetime with gift relief carry your original base cost with them, so the gain is waiting for whoever sells next.

Inheritance Tax often points the other way. A lifetime gift that you survive by seven years leaves your estate entirely, together with any growth in value after the gift. Shares held until death are valued at that point and rely on business relief to cover them.

Which matters more depends on the value of the company, how much of it relief covers, whether the family intends to keep or sell, and your own age and health. A County Durham manufacturer whose son expects to sell within a few years of taking over faces a very different calculation from one whose daughter plans to run the business for decades.

What if a family member pays for the shares?

A sale at full market value is taxed like any other sale. You pay Capital Gains Tax on the gain, and Business Asset Disposal Relief may reduce the rate if its conditions have been met for long enough. Our guide to tax when selling a business covers that position in more detail. Nothing is given away, so there is usually no Inheritance Tax.

Many family transfers sit in between, with shares changing hands for less than they are worth or for a price paid over several years. A sale at an undervalue is part sale and part gift. Gift relief can be reduced where something is paid, and the gifted element counts for Inheritance Tax. Where the price is paid over time, the way the arrangement is documented affects when tax falls due.

Should the shares go into a trust?

A trust lets you give away value while trustees control the shares, which appeals to owners whose children are young or not yet ready to own part of a company. The tax treatment differs from an outright gift. A gift into most trusts is an immediate chargeable transfer for Inheritance Tax rather than a potentially exempt one, and the trust can face charges of its own at regular intervals and when shares leave it. A trust from which you or your spouse can benefit is excluded from gift relief altogether.

Some trusts set up before the business relief changes now sit in a different position from the one they were designed for. A trust is a legal structure as much as a tax one, so the drafting needs a solicitor as well as tax advice.

Are there tax traps when shares go to younger family members?

Two come up often. Where a parent gives shares to their own child who is under eighteen and unmarried, dividends on those shares can be taxed as the parent's income rather than the child's once they pass a small amount. Gifts from grandparents are treated differently.

Where the person receiving shares works in the company, it matters whether they received the shares as a family member or as an employee. Shares acquired because of employment can be taxed as earnings. Transfers made in the normal course of family relationships are generally outside those rules, but the line is not always obvious when a daughter is also a director.

How are shares valued when they pass to family?

Even where no money changes hands, both taxes need a value. Capital Gains Tax uses the market value of the shares transferred. Inheritance Tax measures the fall in value of your estate, which is not always the same figure. Giving away a holding that takes you below control of the company can reduce the value of what you keep by more than the value of what you give, and the Inheritance Tax position reflects that.

HMRC has a specialist team that reviews share valuations, and a figure documented at the time of the gift is far easier to defend than one reconstructed years later. Our article on how to value a business before you exit sets out the main methods, and our business valuation service provides an independent figure where one is needed.

What should be checked before shares change hands?

Most of the tax risk in a family transfer is settled before the transfer happens. These questions are worth answering first.

• Is the company clearly trading? Cash and investments built up over years can affect gift relief and business relief as well as Business Asset Disposal Relief.
• Who will own what afterwards, and does that leave the right people holding the right reliefs?
• Are any assets used by the company, such as premises, owned personally rather than by the company? These are often treated less generously than the shares themselves.
• Do your will, the articles of association and any shareholder agreement match the plan? Our article on shareholder protection and exit planning explains how the wording of share purchase arrangements can affect business relief.
• If some tax cannot be relieved, how will it actually be paid?

Take a family haulage company in Teesside where the yard is owned by the founder personally and rented to the company. Gifting the shares and keeping the yard leaves two very different assets on two different tax footings, and the order in which they are dealt with matters.

How can Pulse help with passing a business to family?

We look at the company, the shareholders and the family's intentions together, confirm which reliefs apply and where they could fail, and work alongside your solicitor so the documents match the tax position. The Exit Readiness Scorecard gives a quick view of how your company stands on structure and records, and our exit planning service covers family succession alongside the other routes out.

If you are thinking about passing shares to the next generation, speak to our team before anything is signed. Several of the reliefs involved look back over a period of ownership, and the choices made now decide what your family pays later. For the wider picture of preparing a company for its next owner, read our business exit planning guide.

FAQs

Do I pay Capital Gains Tax if I give shares in my company to my children?

Usually not at the time, if gift relief is claimed. A gift of shares to a child is treated as a disposal at market value, so a gain can arise even though nothing is paid. Where the company is a trading company and the conditions are met, you and your child can jointly claim gift relief, which passes the gain to them to be taxed when they eventually sell.

What is the seven year rule when gifting business shares?

A gift of shares to another person is a potentially exempt transfer. If you survive the gift by seven years it falls outside your estate for Inheritance Tax. If you die within that period, the gift is brought back into account, and business relief on it generally depends on the recipient still owning qualifying shares when you die.

Can business relief be lost after shares have been gifted?

Yes. Relief on a lifetime gift is tested again if you die within seven years. If the recipient has sold the shares without reinvesting in qualifying property, or the company no longer qualifies as a trading company, relief can be reduced or lost, and Inheritance Tax becomes payable on a gift that was expected to be covered.

Do I need to tell HMRC when I gift shares to a family member?

Usually yes, through your tax return. A gift of shares is a disposal for Capital Gains Tax, so it normally needs reporting, and gift relief has to be claimed on HMRC's claim form signed by both of you. A potentially exempt transfer does not usually need reporting for Inheritance Tax when it is made, but a record of the gift and its value matters if you die within seven years.

Does the business relief cap affect smaller family companies?

Many smaller companies remain fully covered, because full business relief still applies up to a set allowance per person and any unused allowance can pass to a surviving spouse or civil partner. Companies worth more than the available allowance, or owners who have used part of it on earlier gifts, can now face Inheritance Tax on the excess at a reduced rate.

What happens when a family member later sells shares they were given?

If gift relief was claimed, the gain that was held over is added to any growth during their ownership, and Capital Gains Tax is charged on the total when they sell. Whether Business Asset Disposal Relief reduces the rate depends on their own shareholding and role in the company over the qualifying period before the sale, not yours.