How do you transfer shares after the death of a shareholder?

How do you transfer shares after the death of a shareholder?

When a shareholder dies, it can cause disruption and uncertainty within a business.

Transferring shares owned after death will depend on the company's articles of association, shareholders agreements and if there is a will in place. Having these documents in place, can make the transfer of shares much simpler.

In this blog, is a quick reference to the processes when dealing with a deceased shareholder's shares.

What happens in the event of a shareholder's death?

The first thing you should do when a shareholder dies is to find and read your articles of association, shareholders agreement and check if there are any cross option agreements in place. You should work with the family of the deceased shareholder to also discuss the shareholders will.

If the shares are in the deceased's name alone, then the title to the shares passes automatically to the personal representatives. The personal representatives rights on how to deal with the shares will be dependent on the company's articles of association and any shareholders agreement.

It is important for surviving shareholders and the deceased individuals family members to work together to understand the specific provisions relating to shares and conclude the matter as per the wishes expressed by the deceased wherever possible.

What is a personal representative?

A personal representative is a person who is legally entitled to administer the estate of a deceased person.

The will

Shares form part of the estate of the deceased shareholder. If there is a will, the executors or personal representatives would administer the shares. If there is no will, the administrators would administer the shares.

The will generally does not outweigh the company constitution or written agreements made within the company regarding the transfer of shares.

Reviewing the company articles and shareholders agreement

The company’s articles and any shareholders’ agreements should be reviewed to determine if they contain any specific provisions relating to the death of a shareholder.

Articles of Association are normally stored at Companies House. Shareholders agreements are normally private agreements in writing and not filed at Companies House.

If a business has used the most common articles of association, then these normally mean that the individuals that have inherited the shares will have title to the shares. However, this does not necessarily mean they have the right to attend or vote at general meetings, until they register on the company's register.

This can often cause difficulty in a business if the family members who have inherited the shares decide to become involved in the day to day decisions without any previous experience of the business.

Bespoke articles of association and a bespoke shareholders agreement can help if they contain clear directions of what should happen when a shareholder dies.

Bespoke articles of association will often contain restrictions on the transfer of shares. It is possible to state that those in charge of the deceased's estate cannot transfer shares owned to anyone unless they are offered first to existing shareholders. These types of provisions around first refusal are called 'pre-emption rights'.

A shareholders agreement is a private agreement between shareholders of a company and can help to prevent shares transferring to unwanted third parties.

In all cases, you need to consider if the articles or the shareholders agreement conflicts with anything in the individuals will. However, if this is the case, the company's articles and shareholder agreement will take precedent over the will.

Cross option agreements

There can be other agreements in place that deal with the transfer and allocation of shares on death and one example is a cross option agreement. This is an agreement between shareholders that gives the surviving shareholders an option to buy back the shares of the company when a shareholder dies.

Things to consider on death of a shareholder

Many private limited companies are owned by shareholders but are managed by directors. Depending on the number of shareholders and directors, things you need to consider on the death of a shareholder may be different.

If the company has more than one shareholder/director, the company can still run as usual, whilst share transfers take place. The personal representatives of the deceased have a right to be entered into the limited company's register of members.

If there are no specific provisions in the articles or shareholders agreement, then the shares will pass to beneficiaries in the will. This could mean that beneficiaries without a connection or interest in the company can begin to be involved in business decisions. This can cause issues with the ongoing running of the company.

If the deceased is the company’s sole director, but there are other shareholders, the surviving shareholders can hold a meeting to appoint a new company director.

In the case of a sole director/shareholder dying, the deceased’s personal representatives have the right of the model articles to appoint a new director by notice in writing.

Once the new director has been appointed, any transfer of the deceased’s shares to and from their personal representatives can be formally registered by that director in the company’s registers, and the business can continue to trade.

Transferring company shares

The process to transfer shares can be complex, depending on the documents in place, number of shareholders and beneficiaries. You should seek relevant legal and tax advice. Some of the steps in the process may be as follows:

Check the will, articles of association, shareholders agreement and cross option agreement.

Check if there is any conflict within these documents.

If there is a right of the remaining shareholders to purchase the shares, then this must be considered and offered.

If the remaining shares pass to the will's beneficiaries, the representatives of the estate should initiate the transfer of shares process.

Check the tax position, depending on how the transfer takes place.

Obtain share certificates from the personal representatives.

Completion of a stock transfer form.

Resolution of the company's directors approving the share transfer.

Update of the shareholder register. The company secretary can amend the register of members to add the word 'deceased' after the name of the shareholder that has passed away and insert the name(s) of the beneficiaries. The changes need to be registered at Companies House.

Note: A company cannot have unallocated shares; therefore, you cannot notify the Companies House before the issue of where the shares will be transferred to is dealt with.

Tax implications

Transfers of shares (assets) between married couples and civil partners are tax-free free from both Capital Gains Tax and Inheritance Tax. 

For Capital Gains Tax the transfers take place at no gain/no loss, and it is also an exempt transfer for Inheritance Tax purposes as well.

On death if you hold company shares, these Company shares held at date of death will be exempt from IHT by way of Business Relief (BR) if the shares are in a trading limited company and have been held for two years.

If the spouse keeps the shares until their death, then BR may well apply on their death. If the spouse sells the shares, for example to other shareholders and the cash is then in the spouse’s estate, that cash will be subject to IHT on their death so BR will have been lost.

If shares are transferred directly to beneficiaries, then no Capital Gains Tax will be payable on these shares when they are transferred, as the base cost of the shares benefit from a tax free uplift to probate value. However, if the beneficiary then decides to sell the shares at a later date, they may become liable for CGT at this point.

The gain will be based on the difference between the value of the shares at the date of death and the eventual sale proceeds this figure can be deducted from the sale value of the shares to calculate the gain. This is the amount that may then be liable for CGT.

How can Haines Watts help?

Haines Watts can advise you on all areas of tax implications on the death of a shareholder and can ensure you get the right legal advice on the complexities of the transfer process, through our recommendations to appropriate solicitors.

Conclusion

Protecting a private limited company from the potential chaos caused by the death of its director/shareholder can be achieved by making the relevant modifications to the company’s articles of association. It is advisable to incorporate appropriate alternative director provisions into a company’s articles of association and have shareholders agreements in place to ensure the death of a shareholder does not adversely affect the day to day running or the future or the business.

If you need more help and advice then contact us at our offices inWirral,  Chester and Liverpool.