In England and Wales the law doesn’t prevent a minor – defined as a child under the age of 18 – from owning assets, with the exception of land and buildings. However, this is complicated by the fact that a minor lacks legal capacity, so any contract they enter into (except for so called ‘necessary’ items’) is voidable by them while they’re still under 18. *
So, theoretically, a child could renounce obligations placed upon them by owning shares, effectively turning their back on the shares. This is a particular problem where shares are nil paid or partly paid, as the child could choose to give up the shares when a call is made by the company. If you issue shares or allow transfers of shares to children, it may also make it harder to bring on board other investors in the future, because others may be nervous about the fact that children involved in the company may choose to default on their obligations. More generally, it’s an administrative headache that many companies would prefer to do without.
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For this reason:
- Public companies often exclude minors from holding their shares;
- Many other companies will have a provision in their articles of association meaning that shareholders under the age of 18 will not be accepted;
- Even where there is no restriction in the articles, the terms of many new share issues are defined to exclude minors from making an application.
Despite these restrictions, there are lots of companies where children are accepted as shareholders. Often, shares will purport to pass to children upon a previous owner’s death. Particularly among small family owned companies, shares may be allotted to children as part of long-term inheritance tax planning, providing them with shares which will hopefully rise in value over time. Many business owners consider giving their children shares and then paying dividends on those shares, looking to take advantage of the children’s personal tax allowances – but the law is very strict in this area, and income from shares transferred from a parent to their child will usually still be taxed on the parent.
So, in cases where the above restrictions don’t apply, there’s nothing to prevent a share allotment to a child or shares being transferred to a child shareholder. Where new shares are being allotted, you should consider whether to allot shares in an existing share class or whether a new share class should be created. This is an area where professional advice, which takes account of your personal circumstances in the context of the legal framework, is highly desirable.
If you choose to allot or transfer shares to a child, you should also consider other consequences:
- By giving up a proportion of shares, you lose control of part of the business. While it might seem a good idea now to give your child something for the future, they may later decide they want to have nothing to do with the business. Worse, in future they might choose to block resolutions you propose or even try to wrest control of the company from you.
- Some banks or other providers require all shareholders to consent before a contract is entered into. If a child, who lacks capacity to contract, holds a proportion of the shares then it may be difficult for the company to access such services.
- While a parent might sacrifice some control over their company be transferred shares to their minor children, anti-avoidance measures mean any dividend income (above £100 gross annually) on those shares will still typically be taxed as the income of the parent.
- If, by virtue of giving shares to a child, your shareholding falls below certain percentages, you might no longer be eligible to certain tax reliefs, which sometime require you to own or control more than (say) 50% of the shares in issue.
- If a minor child suddenly obtains a significant shareholding, it may have a demotivational effect on senior employees. They may have shown immense dedication to the company but still hold little (if anything) in the way of shareholdings. If shares are handed out to the business owner’s children for no effort, employees who’d like to grow their influence over the company may decide that their efforts are ultimately in vain. The desire to pass on control of a company to children while still maintaining the support of non-family employees can be particularly difficult to balance in “family companies”.
- Because they lack legal capacity, minor shareholders may also not be appropriately constrained by the terms of any shareholders’ agreement that’s in place.
- There can be problems if a sale of the child’s share is necessary before they reach the age of majority. Some agents may refuse to process the sale because of the legal issues involved. Because the original owner has ceded control of the shares, they are likely to need to apply for a court order to facilitate the sale of a child’s shares.
Alternatives to a child holding shares
There are also a number of possible alternatives to a child holding shares directly, which may be worthy of consideration:
- Shares might be held by suitable adults, for example parents or grandparents.
- Slightly differently, the shares might be held in the name of an adult but distinguished from other shares by adding a designation to the account. A designation is a brief identifier, often initials and typically not a child’s full name, which serves to segregate the shareholding from others held by the adult. So, for example, the shares might be recorded as being in the name of John Smith re PJS, where PJS might refer to a minor child.
- A trust could be set up for the benefit of the child. The shares are then held in the names of the trustees, regulated by the terms of the trust. There are many types of trust, with a lot of opportunity to tailor provisions to particular circumstances. However, the requirements can be very complex, so it’s an area where you should take professional legal advice.
If a child does take on shares, the company’s registers – particularly the register of members – will need to be updated accordingly. Dependent on the level of their shareholding and the nature of control, the child may also need to be recorded in the company’s registers as a person of significant control. Note, however, that the law prevents anyone under the age of 16 from acting as a director of a company, so regardless of the level of their shareholding, the child cannot be appointed as a director.
* As in many legal matters, the situation in Scotland is different. In Scotland, 16 year olds are deemed to have full legal capacity, although someone aged between 16 and 18 may apply to have legal agreements set aside before they reach the age of 21.
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