Leaving Shares to a Child Who Cannot Be a Director

A minor can inherit shares in a limited company. What a minor cannot do is run the company those shares belong to. Ownership and control are two different things, and a death is the moment a family discovers how far apart they sit.

Under the Companies Act 2006 a person must be at least sixteen to be appointed a director. So a younger child who inherits the shares cannot be put in charge at all, and even a sixteen-year-old is rarely equipped to run a trading business in the weeks after a bereavement. Meanwhile the shares themselves are normally held on trust until the child grows up. That means somebody else holds them and votes them in the child's place, potentially for the next ten or fifteen years.

So the honest position is this. Your will can pass the value of the company to your child. It cannot pass the running of it. Between the two sits a gap that has to be filled by other people, and if you have not decided who those people are, the law and your co-owners will decide for you.

The short answer: they can own the shares, not run the company

Shares are property. Like any other property, they can be left in a will and can pass to a child. What comes with them is economic value and, in principle, votes at general meetings. What does not come with them is a seat in the director's chair. A shareholder owns part of the company; a director runs it; and the two roles are filled in completely different ways.

This catches families out because in a small company the owner is almost always both. One person holds the shares and makes every decision, so the distinction never has to be drawn in life. Death draws it sharply. The shares go where the will sends them. The directorship simply ends, because a director's appointment is personal and does not pass to anybody. If your child inherits your shares, they inherit the ownership and none of the authority.

The practical consequence is that a company can end up owned largely by a child while being run by other people entirely, and everyone has to live with that arrangement until the child is old enough to take a hand in it.

Why a child is not simply added to the share register

You might assume the company simply writes the child's name in the register of members and the job is done. It is rarely that simple, for two reasons.

The first is that a contract with a minor is generally voidable by the minor. A company does not want a member who can walk away from obligations that other shareholders are bound by, so many companies' articles of association either prohibit registering a person under eighteen as a member or give the directors a discretion to refuse. Where the articles say that, the shares are held for the child rather than by the child, and it is the holder on the register who exercises the rights.

The second is that the articles frequently contain pre-emption or compulsory transfer clauses that bite on death. These can require the deceased's shares to be offered to the surviving shareholders before they can pass to a family beneficiary at all, sometimes at a valuation fixed by the articles rather than the market. A will cannot override the company's constitution. Where the two disagree, the articles usually govern the register, so a gift of shares to a child can be diverted before it ever reaches them. This is one of the reasons an owner's plan to leave the firm to their children can quietly fail, and it sits alongside the wider question of who is entitled to run things after a death.

Who actually holds the shares: the trust

Because a young child cannot sensibly hold shares directly, they are almost always held on trust. The trust may be created deliberately by your will, or it may arise by default. Either way, trustees become the registered owners while the child is the person who benefits.

If you make no provision, a gift to a minor in a will is typically held on a bare or statutory trust until they reach adulthood, with your executors or appointed trustees holding it in the meantime. If you plan properly, you can set up a trust with chosen trustees, a clear statement of what they may do, and a longer horizon than the age of eighteen if you think that sensible. The trustees you choose matter enormously, because for the whole of the child's minority they are the ones the company deals with, not the child.

Trusts also do useful work beyond simply holding the shares until a birthday. The same structure is used to keep a life policy outside the estate, which is why families arranging life cover written in trust to pay a business inheritance tax bill often set up the trust and the succession plan in the same conversation. The trustees managing the shares and the trustees receiving any policy proceeds can be the same people, working to the same instructions.

Who votes the shares, and in whose interest

This is the question that decides how the business actually runs, and it has an uncomfortable answer. Whoever holds the shares votes them. While the child is young, that is the trustees. They cast the votes attached to the child's shares at general meetings, and they are bound to do so in the child's interests.

Read that last sentence again, because it is where the friction lives. The trustees must act for the child, not for the business and not for the people working in it. If the company wants to reinvest profits and the trustees think the child needs income, those interests pull in opposite directions. If the surviving owners want to issue new shares, the trustees may vote against diluting the child's stake. A block of shares voted by trustees who owe their duty to a beneficiary can behave very differently from the same block voted by an owner who works in the business every day. Where the inherited holding is large, this becomes acute, and we set out that specific version of the problem in our piece on who votes a majority shareholder's shares after death.

None of this is bad faith. It is the trust doing exactly what a trust is for. But it means the company's direction can be set, for years, by people whose legal duty is to a child rather than to the firm.

The age line: sixteen for a director, eighteen for control

There are two ages that matter here, and they are not the same.

The first is sixteen. The Companies Act 2006 provides that a person may not be appointed a director unless they have reached the age of sixteen. So a child under sixteen cannot be a director in any circumstances, however many shares they own. A sixteen- or seventeen-year-old can in law be appointed, but putting a teenager in charge of a trading company is a serious step that the other owners have to agree to, and it does not follow automatically from owning the shares.

Source: Companies Act 2006, section 157, published at legislation.gov.uk under the Open Government Licence v3.0.

The second is eighteen, the age of majority in England, Wales and Northern Ireland, at which a person can hold shares and enter contracts in their own name without the voidability problem. Until then the trust arrangement stands. So even a beneficiary old enough to be a director may still not control their own shares if the trust is written to run past eighteen, which many are, precisely so that a large shareholding does not land on a young adult all at once.

The friction with the other owners

Put the pieces together and you can see where the trouble starts. A child owns a chunk of a company. Trustees vote it in the child's interests. The people actually running the business hold the rest and answer, at general meetings, to those trustees. Nobody is doing anything wrong, and yet the arrangement is built to generate disagreement.

The surviving owners may find their plans checked by a shareholder who takes no part in the work. The trustees may find themselves pressed to sell the shares back at a price they consider too low. The family may feel shut out of a business they part-own but do not understand. And all of this plays out while a company still has to trade, pay staff and file accounts. If the deceased was also carrying company debt or personal guarantees, the strain is worse still, which is why the position of a one-person limited company with debts on the owner's death is worth understanding before it becomes your problem rather than a hypothetical one.

Owners sometimes assume a workplace death-in-service scheme or company-paid cover would smooth this over. Often there is none, because nobody arranged it, a gap we describe in our piece on the director who assumed the company covered them. And where the owner drew a small salary and large dividends, even the cover that does exist can be smaller than expected, for the reasons set out in how a low salary and high dividends can limit your cover.

What you can do now, while you are alive

The better news is that almost every problem above is solvable in advance, and none of it can be solved after death. Four things are worth doing while you can still do them.

• Read your articles and your will together. If the articles force your shares to be offered to your co-owners on death, leaving them to your child in your will does not defeat that. Make sure the two documents say the same thing, or you will leave your family a fight.
• Choose your trustees deliberately. The people who vote your child's shares for a decade should understand both the child and the business. Naming them in the will, rather than letting the default apply, is a small task with a large effect.
• Put a shareholders' agreement in place. A clear agreement can set out what happens to a deceased owner's shares, who has the option to buy and to sell, how the price is fixed, and how a buyout is funded, so the trustees and the surviving owners are not negotiating from scratch during a bereavement.
• Fund the buyout. An agreement that the survivors will buy the child's shares is only worth as much as the money behind it. Cover arranged for the purpose puts cash in the right hands at the right moment, so the trustees can be paid a fair price and the business can move on. If you want to price that against your own shareholding, you can get life insurance quotes and have an FCA-authorised broker size it to the value of your stake.

Scotland and Northern Ireland

Company law itself is UK-wide, so the age of sixteen for a director and the separation of ownership from control apply the same way across Scotland, England, Wales and Northern Ireland. What differs is the surrounding law of capacity and inheritance.

In Scotland the age of legal capacity is sixteen, not eighteen, under the Age of Legal Capacity (Scotland) Act 1991, so a Scottish sixteen-year-old can generally hold property in their own name, although certain transactions can still be challenged as prejudicial until they are older. In Northern Ireland the age of majority is eighteen, as in England and Wales, and the succession rules differ in their detail from those on the mainland. Wherever you are, the machinery around the shares changes; the fact that a young beneficiary cannot run the company does not. For the wider picture, see our guide to what happens to a business when an owner dies.

Frequently asked questions

Can a minor inherit shares in a limited company?

A child can benefit from shares, but the shareholding is normally held on trust for them until they reach adulthood, and many companies' articles restrict registering a minor as a member. The trustees hold the shares and exercise the votes in the meantime, so the child owns the value without controlling the holding.

How old must someone be to become a company director?

At least sixteen. The Companies Act 2006 sets a minimum age of sixteen for an individual to be appointed a director, so a younger beneficiary cannot be appointed to run the company even if they have inherited most of the shares in it. Being able to own a company and being able to run it are two separate things.

Who votes the shares while the child is young?

Whoever holds them, which is usually the trustees appointed by the will or arising under the intestacy rules. They vote in the child's interests, which may not match the interests of the owners working in the business, and that is where friction usually starts.