What are alphabet shares?
Limited Companies are traditionally formed with a nominal number of ordinary shares. As the company grows and more shareholders are added, alphabet shares are certainly something to consider.
In this blog our Director of Operations, Laura Hepworth explores what alphabet shares are and how they could be of benefit to you as a Limited Company contractor.
Dividend waivers vs alphabet shares
Dividends are received by all the shareholders of a Limited Company, in proportion to their personal shareholdings. Should one shareholder be paid a different amount to the other shareholders, there either needs to be a dividend waiver or the share structure needs to be amended.
- If you believe you’ll use dividend waivers on a regular basis to distribute company profits disproportionately to the same class of shareholder, then it’s advised to use alphabet shares as a permanent alternative method.
- HMRC are more likely to question dividend waivers.
- Waivers can be seen as unreliable as all shareholders must give their consent each time. Alphabet shares do not need the consent of all shareholders, as they are already pre-agreed.
- Voting and other rights or restrictions are possible for alphabet shareholders (redeemable and non redeemable) to be assigned to the different classes of shareholders as required.
- Alphabet shares allow the freedom and flexibility in paying dividends, so payments can be made to a certain class of share without having to pay the same amount in dividends to each company shareholder. If your Limited Company’s shareholders are taxed at higher rates than one another (if at all) then alphabet shares are a particularly good idea.
Whether you decide to use dividend waivers or alphabet shares, it’s important to understand whether either is caught by the Settlement Legislation. In short, the Settlement Legislation is designed to expose and punish anyone who uses dividend waivers or alphabet shares purely to divert income from one person to another, thus resulting in a tax advantage.
For alphabet shares it’s particularly important to understand that a lack in voting rights (for example) could result in being caught by the Settlement Legislation.
To ensure you do not fall foul of the Settlement Rules, we advise you do the following:
- Any new shares made under the alphabet scheme must be an outright gift and have exactly the same rights as the original ordinary shares. Restrictions cannot apply (such as being non-voting, carrying lesser rights to capital, or promise to return shares on demand). You must not make the shares redeemable preference shares.
- If you decide to gift shares to spouses, it’s recommended to show that they have an active interest in the running of the company, such as becoming a director, the company’s secretary or even an administrator.
- Only pay dividends into a bank account that holds the recipient’s name (such as joint accounts) to ensure you don’t attract unwanted HMRC attention.
- Remember that in order to claim Entrepreneur’s Relief should you decide to sell the company, a 5% share is required.
- Pay some dividends to each type of share, so as to minimise the risk of HMRC claiming that dividends should not be paid, unless one class of share was not allocated any dividend.
Should you have any questions about alphabet shares and how they could compliment your Limited Company, speak to one of our expert advisers today.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.