Are different classes of shares a risk ?

Are different classes of shares a risk ?

Didn't find your answer?

I would be most grateful of any comments forum members have on the following;

One of my clients is a limited company with the following shareholdings

He, a full time working director holds one class A share.

Receives small salary and monthly dividends.

His wife holds one class B share receives no dividend or salary and has no involvement with the company.

Could HMRC question this arrangement?

Replies (6)

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By User deleted
14th Aug 2012 15:30

Of course they could

Whether they'd be satisfied with the answer to the question is another matter

Thanks (1)
Replying to Portia Nina Levin:
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By Albie
14th Aug 2012 15:43

In that case gift to him and convert to class A I think

Thanks BKD,

The wife's shares are serving no purpose so I think I will suggest she gift them to him then he can convert the B shares to A shares and I think it should be fairly watertight then.

He would hold 100% all of the same class.

Comments?

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By User deleted
14th Aug 2012 16:04

Comments?

I wouldn't do anything. You asked if HMRC could question the arrangement. I said that they could, not that they would. Even if they did, I'd be pretty confident in sending them off with their tail between their legs. In any event, HMRC challenge is more likely to be in respect of husband's profit extraction rather than anything to do with the B share.

But there are a number of issues that you need to think about. For instance, depending on what rights the B share has - and therefore affecting its value - a sale of the company may give rise to a gain in wife's hands without benefit of Entrepreneur's Relief. On the other hand, depending on the amount of such gain, the second annual exemption may be valuable.

If you want to transfer the share, I don't see any need to convert it - nothing wrong with a sole shareholder having different classes of share.

 

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Replying to Euan MacLennan:
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By Albie
15th Aug 2012 09:56

With you now.

Thanks BKD.

Ok, with you now, I had not got the gist of your first response and now appreciate what you're saying.

On the capital gains issues, I had thought about that and any disposal would be quite a long way down the line as he only set up last year, but is very successful and profitable. I agree it needs to be factored into any decision.

Your feedback is very useful, I appreciate it.

Albie

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By stgreg
14th Aug 2012 16:11

yes, but what would the quetsion be?

What would HMRC ask?

Presumably "Why are there different classes of shares?"

Answer "Because that is what was decided by the directors and that is what is registered at Companies House. They wanted different classes of share so as to reflect different rights for different shareholders."

So what happens next?

By having different classes of share your H&W company can pay dividends that are not pro-rata and thus they can be flexible in a tax effcient way. That is, I think, the purpose of them.

Is there a rule against this?

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Replying to Ellabobbin:
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By Albie
15th Aug 2012 10:16

Point taken

Thanks stgreg,

I agree, the purpose of the different classes of shares is as you have stated.

I was just a little bit concerned that I may be raising a risk level unnecessarily by maintaining the different share classes.

But I take your point. 

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