Alphabet Shares And Planning For Family Companies
Be careful how you allocate dividends ...
POSTED BY HELEN BEAUMONT ON 01/02/2019 @ 8:00AM
When paying dividends from a company, sometimes it's better to use Alphabet Shares rather than dividend waivers ...
It's tempting to issue alphabet shares in your family business, but be careful of how you allocate dividends!
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We all know that dividends are paid to shareholders in proportion to the number of shares they own in the company. However, there are times when one shareholder has to be paid a different amount to others.
"In cases such as this, we need to use a dividend waiver or the share structure needs amending!"
HMRC may question dividend waivers and, in cases such as this, it's advisable to use alphabet shares instead. This is because dividend waivers are seen as unreliable due to shareholders needing to give their consent prior to the dividend being declared.
Alphabet shares do not need the consent of shareholders as dividends are declared with reference to the number of shares held, meaning that dividends declared to alphabet shareholders do not need to match the dividends declared to holders of ordinary shares.
You can also attribute restrictions and rights to alphabet shares. You could choose to restrict voting rights, distribution rights or even the entitlement to capital on a winding up of the company at some future time. And if your limited company's shareholders are taxed at higher rates than one another, alphabet shares are a particularly good idea.
Whether you use dividend waivers or alphabet shares, you must be careful of not falling foul of the settlement legislation. This is designed to expose and punish anyone who tries to divert income from one person to another, giving them a tax advantage. A lack of voting rights resulting from alphabet shares could result in you being caught out by the settlement legislation.
If you're thinking of issuing alphabet shares, you need to know the following:
Shares given under the alphabet scheme must be an outright gift and care needs to be taken if they have different rights to ordinary shares.
If you gift shares to family members, show that they have an active interest in the running of the company (such as being a director), the company secretary or even an administrator.
Only pay dividends into a bank account that holds the recipient's name (preferably their sole account) to ensure you don't get HMRC's attention.
In order to claim Entrepreneur's Relief if you decide to sell the company, a 5% share is required.
Pay 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.
In a family business, it is tempting to issue alphabet shares to your family so they can benefit from your hard work and efforts, but not have the ability to influence your decisions. Be very careful of this approach as you could be caught out by HMRC and get into serious trouble.
"Would you like to know more?"
If you'd like to find out more about alphabet shares, dividend waivers and planning for your family business then do give me a call on 01908 774323 or click here to ping me an email and let's see how I can help you.
Until next time ...
If you're looking to work with an expert tax advisor with a wide range of tax experience, do visit www.essendontax.co.uk to find out more about me and discover how I can help!
More about Helen Beaumont ...
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen’s specialist knowledge in tax planning and experience ensures every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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