A and B Shares

A and B Shares

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A company was set up several years ago with A & B shares issued on incorporation (A to father & B to son) with the following prescribed particulars:

Voting rights: one vote per share;

Dividend rights: entitled to such dividends as the directors determine;

Rights to participate in capital: full rights to return of capital and to any surplus; whether redeemable: not redeemable

Dividends have historically been paid equally on both the A & B shares. The father is now winding down his involvement so would like to reduce his dividend or sometimes not take one at all.

I believe that this is fine unless it comes to a point where distributable reserves would not have been sufficient to cover dividends if they were paid equally on all shares.

Is this relevant if the company was formed with the rights for each share set out above?

Replies (9)

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Danny Kent
By Viciuno
24th Jan 2023 12:01

No need for dividends declared on A shares to be have reserves available to pay the same to B shares as well; both independent of each other.

I assume that A&B shares were set up and the articles reflect that (and they are not ordinary shares of the same class simply being treated as A&B shares)?

Thanks (1)
Replying to Viciuno:
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By Elgin
24th Jan 2023 12:20

Thanks. Correct regarding Articles being set up with two classes of shares.

Plus:
Subject to the provisions of the Act, the directors may, in their absolute discretion, declare final or interim dividends on any class or classes of shares and when so declaring may vary the dividend payable between the different classes of shares and may determine that any class or classes may receive a dividend and that another class or classes shall not, and article 30 of the Model Articles shall be modified accordingly.

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Replying to Viciuno:
By Ruddles
24th Jan 2023 12:42

Legally, that is correct - the entire profits may be paid out in respect of one class of share.

There are potential tax implications, though, if the disproportionate dividends were being paid for tax reasons. In the OP's case, though, a highly unlikely scenario.

Thanks (2)
By SteveHa
24th Jan 2023 14:05

Quote:
unless it comes to a point where distributable reserves would not have been sufficient to cover dividends if they were paid equally on all shares.

For info, you are confusing alphabet shares and dividend waivers.

Thanks (1)
Replying to SteveHa:
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By Elgin
24th Jan 2023 14:20

Hello,

Thanks for the reply. I am aware of the position regarding waivers and had thought that reserves would not be an issue until reading this:

www.taxinsider.co.uk/alphabet-shares-why-use-them-traps-and-pitfalls and the practical tip ends with 'To prevent a challenge by HMRC that the dividends could not have been paid unless one class of share was not allocated any dividend, it would be preferable for the company to have sufficient distributable profits so that dividends were capable of being paid on all classes of shares'

In this particular case, the dividends would be taxed at basic rate either way, so there is no tax advantage incentive.

Thanks (0)
Replying to SteveHa:
By Ruddles
24th Jan 2023 14:43

Not necessarily. HMRC take the view that the use of alphabet shares for paying disproportionate dividends, where there are insufficient reserves to cover a 'full' dividend, is in substance the same as using waivers.

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Replying to Ruddles:
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By Elgin
24th Jan 2023 14:46

Hello,

Is risk minimal in this case as the dividends would be taxed at basic rate either way?

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Replying to Elgin:
By Ruddles
24th Jan 2023 15:02

In this case I would say that the risk is lower than minimal - I assume that the son is now an adult?

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Replying to Ruddles:
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By Elgin
24th Jan 2023 15:10

He is indeed an adult. Thanks very much for taking the time to reply.

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