Alphabet shares: What are they and how can they can help me with tax planning?

What are alphabet shares?

When a limited company is set-up, usually a nominal number of ‘ordinary’ shares are issued, i.e. one or even ten.

If you have more than one shareholder, the dividends or profit extraction is shared equally among each of you automatically.

However, it is possible after forming a company to consider changing the share structure of your limited company and using alphabet shares, which allow your business to bring in shareholders but with different share classes where you have some control on how much profit they receive from the company, as well as control or voting rights in the business.

Alphabet shares are named as such as they are denominated as ‘A’, ‘B’ or ‘C’ ordinary shares, and so on.

𝗗𝗶𝘃𝗶𝗱𝗲𝗻𝗱 𝘁𝗮𝘅 𝗽𝗹𝗮𝗻𝗻𝗶𝗻𝗴

It is quite common to use alphabet shares if you bring in family members to the business.

The change in share structure does involve a change in the legal documentation of the company and articles of association, and it is important these changes are done correctly so the right level of dividends are paid out to family members as well ensuring the voting rights or control of the business is as you wish versus shared equally.

The alphabet shares arrangement therefore allows the distribution of dividends in the ratio you wish versus on an equal pro rata basis between shareholders. One class of shares may not even receive any dividends at all, perhaps a minor child for example.

𝗙𝗮𝗺𝗶𝗹𝘆 𝗜𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝗖𝗼𝗺𝗽𝗮𝗻𝗶𝗲𝘀 (FICs)

These family company structures often use alphabet shares to allow for control to be allocated via the voting rights, income to be controlled and distributed via dividend rights and the capital rights used for some sort of inheritance tax planning, such as using a discretionary trust.

Seeking help to work tax efficiently

As with all tax planning, individual circumstances need to be considered as there is never a one-size fits all solution.

Mirandus advise on these sort of structures so please get in touch to see how we can help.