When a shareholder passes away, it can create disruption and uncertainty within a business. The process of transferring shares depends on several factors, including the company's articles of association, any shareholders' agreements, and the presence of a Will. Having these documents in place can make the process much smoother and prevent disputes among beneficiaries and remaining shareholders.
The Personal Representatives of the deceased - whether Executors (if a Will exists) or Administrators (if there is no Will) - are responsible for administering the deceased's estate, including transferring or selling shares. However, their ability to deal with the shares is governed by the company's internal agreements rather than solely by the deceased's Will.
The first step when a shareholder dies is to review the company's articles of association and shareholders' agreement. These documents outline the rules governing share ownership and may contain specific provisions for handling a shareholder's death. If there are cross-option agreements or buy-sell agreements in place, they may determine how the shares can be transferred.
If the deceased held shares solely in their own name, the title to those shares automatically passes to their personal representatives. However, the extent of their rights and the ability to sell or transfer shares will be dictated by the company's articles of association and any shareholders' agreement.
A Personal Representative is the individual legally responsible for administering the deceased's estate. If the deceased left a Will, this will usually be the Executor(s). If no Will exists, an Administrator will be appointed.
Shares form part of the deceased's estate and are managed by the Personal Representative. However, the company's internal agreements will often take precedence over the deceased's wishes regarding who can ultimately inherit or purchase the shares.
A company's articles of association and shareholders' agreement must be reviewed to determine the specific provisions for handling a shareholder's death. These documents may include:
1. Restrictions on share transfers
Some articles of association contain provisions requiring the shares to be offered to existing shareholders before being transferred to beneficiaries. These are known as pre-emption rights.
2. Voting rights of the personal representative:
In some cases, the person inheriting the shares may not have the automatic right to vote at general meetings until they are formally registered as a shareholder.
3. Cross-option agreements
These agreements allow surviving shareholders to buy the shares from the estate of the deceased, preventing unwanted third parties from inheriting ownership stakes in the business.
The shareholders' agreement and company constitution take precedence over the deceased's Will when it comes to share transfers.
A cross-option agreement is a contract between shareholders that provides an option for surviving shareholders to buy the deceased shareholder's shares. This ensures continuity in the business and prevents shares from being passed to unintended parties. If such an agreement exists, the estate of the deceased may be required to sell the shares to the remaining shareholders at a pre-agreed valuation.
The process of transferring shares after the death of a shareholder involves several key steps:
1. Check the relevant documents: Review the Will, articles of association, shareholders' agreement, and any cross-option agreements to determine how the shares should be handled.
2. Confirm Personal Representatives' rights: Identify who is legally responsible for administering the deceased's estate.
3. Offer shares to existing shareholders (if required): If pre-emption rights apply, the shares may need to be offered to other shareholders before being transferred to beneficiaries.
4. Transfer shares to beneficiaries or buyers: If no restrictions apply, the personal representatives can proceed with transferring the shares.
5. Complete stock transfer paperwork: The Personal Representative must complete a stock transfer form to formally transfer ownership.
6. Pass a director's resolution: The company's board of directors must approve the share transfer.
7. Update the shareholder register: The company secretary should update the register of members to reflect the new ownership and notify Companies House where required.
A company cannot have unallocated shares, so the transfer must be properly documented before the company files any updates with Companies House.
If the deceased was the sole director and shareholder, their Personal Representative must appoint a new director before any share transfers can be completed. The personal representatives can use the company's model articles of association to appoint a director through written notice. Once a director is in place, they can approve the share transfer to the beneficiaries or any buyers.
The transfer of shares after death can have inheritance tax (IHT) and capital gains tax (CGT) implications.
Inheritance Tax (IHT)
Shares held at the time of death may qualify for Business Relief (BR), which can provide 50% or 100% relief from IHT if the following criteria applies:
You can get 100% BPR if:
- The deceased owned a business or an interest in a business
- The shares are in an unlisted company.
- The deceased owned the shares for at least two years prior to death.
You can get 50% Business Relief on:
- Shares controlling more than 50% of the voting rights in a listed company
- Land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled
- Land, buildings or machinery used in the business and held in a trust that it has the right to benefit from
- The deceased owned the shares for at least two years prior to death
If the spouse inherits the shares and retains them, Business Relief may still apply upon their death. However, if the shares are sold, the cash proceeds may be subject to inheritance tax in the future.
Please note that there are several restrictions on claiming BPR, and not all business interests or assets are able to claim the relief.
Shares inherited by beneficiaries receive a tax-free uplift to their probate value, meaning there is no immediate CGT to pay. However, if the beneficiary later sells the shares at a profit, CGT may apply. The taxable gain will be based on the difference between the probate value and the eventual sale price.
Transfers of shares between spouses or civil partners are exempt from CGT and IHT, provided they remain within the marital estate.
For private companies, the death of a shareholder can impact business operations. The remaining shareholders must consider how best to proceed with ownership and decision-making. If no formal agreements are in place, disputes may arise if beneficiaries without business experience inherit shares and become involved in company decisions.
To avoid complications, businesses should consider:
- Having a well-drafted shareholders' agreement to govern share transfers.
- Setting up cross-option agreements to allow surviving shareholders to buy shares.
- Clarifying company voting rights and dividend entitlements in the articles of association.
The transfer of shares after a shareholder's death involves multiple legal, tax, and corporate governance considerations. Executors and Personal Representatives must navigate company agreements, inheritance laws, and tax implications to ensure a smooth transfer process.
By reviewing shareholders' agreements, articles of association, and cross-option agreements, companies can provide clarity on how shares should be transferred, ensuring continuity and stability for the business. Seeking legal and tax advice is essential to ensure compliance and prevent disputes among shareholders and beneficiaries.
Premier Solicitors is a leading UK law firm staffed by lawyers who are devoted to providing a professional and affordable legal service in a comprehensive range of legal services, such as probate and estate administration.
For more information, please call us on 01234 358 080 or visit our contact page to send an enquiry form.
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