Alphabet shares are a way of differentiating shares by using the letters of the alphabet e.g. ‘A’ shares, ‘B’ shares, ‘C’ shares etc. They allow companies to separate shareholders into groups so dividends can be paid at different levels. When a company pays a dividend, all shareholders receive payment in proportion to their individual shareholdings.
In order for one shareholder to be paid at a different rate to someone else, the company needs to either have different types of shares, the underlying shareholdings must be changed, or the use of dividend waivers is required. A dividend waiver is when all shareholders have the same type of share and ‘waives’ their right to the dividend. Though in recent year this has been frowned upon. Waiving your rights to dividends may be perfectly legal under company law, but it is caught by anti-avoidance provisions or the ‘settlement’ rules for tax purposes.
Alphabet shares are the most straightforward method to use, especially if created on incorporation. The different share classes often rank as equal in all other aspects for example, the same voting rights are given.
Using Alphabet shares
The main use of alphabet shares is to enable payment that falls within the class of share without needing to pay the same dividend to each shareholder. This can be beneficial if one or more of the shareholders pays more tax than the other shareholders. Alphabet shares, however, can also be used to give preferential dividends or limited rights to vote at general meetings.
Alphabet shares for employees
Employees can receive dividends via alphabet shares. If structured correctly, they can be incentives for employees as well as a tax efficient means of payments. The shares are usually non-voting and can be redeemable at par value such as £1 on a £1 share for example. This way, the shares can be returned if the employee stops working at the company.
Setting up alphabet shares
There are six steps to setting up alphabet shares.
- ) Create a new class or classes of shares for the company
- ) These classes are set out in the company’s articles of association
- ) The articles explain that the new share classes are adopted by special resolution but can be passed by a written resolution.
- ) Once the new share classes are created, the company then needs to decide to either allocate the new shares or, have existing shares converted to the new classes.
- ) Directors and shareholders should also then consider and approve the changes to the company articles. It can be passed as written resolutions under the new procedures in the Companies Act 2006.
- ) Notices of the changes and resolutions are then sent to Companies House
Tax planning with alphabet shares
Dividends act as a tax-saving way to distribute company profits. The amount paid out can be segmented in different ways such as the seniority of the shareholders for example. This is where alphabet shares can be used, for example, where they have special rights associated with them so different rates can be determined.
If you are setting up a limited company or, already have one and would like to discuss a company restructure or you would like assistant creating alphabet shares, please don’t hesitate to get in touch with a member of the Cooper Accounting team.