Passing Shares to Your Children: How to Avoid a Tax Shock

Many business owners see their company as both a commercial asset and part of the family’s long-term wealth. Passing shares to children can feel like the natural next step, particularly where the next generation is already involved in the business or expected to take over in the future.

However, transferring shares is not always straightforward. The tax treatment, company documents, control of the business and wider family circumstances all need to be considered before decisions are made.

With changes to Business Property Relief now in effect, succession plans may need to be reviewed.

Business Property Relief

Business Property Relief can reduce the inheritance tax payable on qualifying business assets, including shares in certain private companies. Historically, many owners of family companies have relied on this relief as part of their estate planning.

Since 6 April 2026, full relief is no longer unlimited. The first £2.5 million of qualifying business and agricultural property may receive 100% relief, with qualifying value above that receiving 50% relief.

For larger family businesses, this may create an inheritance tax liability where one may not have been expected. The issue is not simply whether shares qualify for relief, but whether the value of those shares now exceeds the level at which full relief is available.

Lifetime gifting

Passing shares to children during lifetime may help with succession planning, but it should not be treated as a quick solution. A lifetime gift of shares can raise capital gains tax issues. It may also have inheritance tax consequences if the donor dies within seven years. Business owners also need to consider whether they still require income from the company, whether they are ready to give up control and whether the children are ready to become shareholders.

There may also be practical company issues. The company’s articles of association may restrict transfers. Other shareholders may need to consent. There may be pre-emption rights, meaning shares must first be offered to existing shareholders before they can be transferred to family members.

The wider planning picture

Passing shares to children should not be looked at only through the lens of inheritance tax. Shares may carry voting rights, dividend rights and rights on a future sale of the business, so any transfer should be considered alongside the wider succession plan.

This is particularly important where some children are involved in the business and others are not. The structure may need to balance tax planning with practical questions about who should control

the company, who should benefit from future income and what happens if family circumstances change.

Check the company documents

Before shares are transferred, the company documents should be reviewed carefully. This may include the articles of association, shareholder agreement, transfer restrictions, dividend rights, voting rights, leaver provisions and any drag or tag rights that apply on a future sale.

The Will, tax planning and company documents should all work together. If they do not, there is a risk that the intended succession plan will not operate as expected.

Planning options

There is no single right answer for every business owner. Options may include lifetime gifts of shares, gradual transfers over time, different share classes, trusts in some circumstances, updated Wills, revised shareholder agreements or life insurance to help meet a possible inheritance tax liability.

The right structure will depend on the value of the business, the family circumstances, the company documents and the long-term plan for ownership and control.

If you are considering passing shares to your children or want to review how the Business Property Relief changes may affect your succession plans, mlplaw’s Private Client and Corporate Law teams can help you understand your options and put the right arrangements in place.