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Alphabet shares – Sharing is caring (and tax efficient too), but beware the difficulties in divorcing a shareholder

A company limited by shares is normally formed using a single class of Ordinary share capital. In recent times however business owners are increasingly turning to an alphabet share structure to serve expansion opportunities, reward key staff or simply for tax planning reasons. Such structures involve the issue of separately designated classes of shares, typically named Class A, Class B, Class C etc.

The attraction in such an arrangement is the ability to restrict voting, dividend and/or liquidated asset rights to only a single class of shares provided the company’s Articles of Association allow. Additionally useful is the ability to afford a more flexible dividend policy as unlike the more traditional approach, distributions can be voted at differing levels and to the exclusion of some shareholders.

Their attraction as a tax planning tool is therefore obvious given the potential to divert funds away from those paying tax at the higher or additional rates but although more robust than the use of dividend waivers, a reasonable approach to income apportionment should be adopted in order to avoid unwanted attention from HMRC under their income-shifting provisions.

One of the most common applications we see in practice is for spouses to be justly rewarded for their involvement in their partner’s business, be it on either a full or part-time basis, with remuneration commensurate with their contribution. Whilst the tax burden attached to dividends has increased over recent years thanks to reforms in legislation, it is still ordinarily more beneficial to receive at least some dividends as part of a remuneration package, even if simply to utilise the £2,000 annual tax-free allowance.

Now whilst such a tool can be invaluable, it is not without potential risk. We would urge caution in your choice of the intended recipient as such arrangements are not often made with divorce or dispute in mind. Although it is not uncommon for a shareholders’ agreement to sit as a silent partner in a business relationship, a marriage certificate, unfortunately, doesn’t confer the same privilege. It is therefore entirely possible that your beloved spouse remains married to your company even after a divorce, something which would uncertainly make for some awkward conversation over the morning tea round.

In summary therefore if an alphabet structure is something that you have not considered previously, we would strongly recommend scheduling a meeting with your professional advisor to discuss the potential benefits which may exist for your business.

Lisa Garfinkle – Barrons