Help with Alphabet shares

Can husband protect the ltd co capital whilst sharing dividends?

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Hello, ideally client wants a company created in which, he the working husband, owns 100 of 100 A shares with a right to dividends, voting, and capital distribution on wind-up + issue 100 B shares - held 51/49 by him and wife which give a right to dividends, voting (if this helps) but no capital distribution on wind-up.
The intention is that if the marriage breaks down the company will cease paying dividends on B shares making them effectively worthless and the husband retains ownwership of the company's built-up capital (protecting the capital being the main intention).

I'm wondering if the Settlement Provisions cause problems because the two share classes don't have equal rights?

Yet, in our favour, the dividends would ordinarily be paid on the B shares splitting the income nearly 50/50 and are not structured so that either H or W avoids HR tax.

Finally, if B shares have voting rights does this mean that Husband ends up with 150/200 votes or are votes organised by share class? i.e. B shareholders are voting making the votes the usual 51/49?

Replies (10)

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By Ruddles
26th Feb 2024 16:51

If B shares have no capital entitlement you have to consider whether they substantially represent a right to income, with all that might entail. I am aware that others here have been recently reading up on Arctic Systems, so let's see what they have to say on the matter.

I am not a divorce lawyer, but I'm not convinced that the cunning plan to leave hubbie with all the capital would work.

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By FactChecker
26th Feb 2024 17:06

Ignoring all such details (yeah I know that's odd coming from such a stickler for the legislative sources!), but the first thought in my mind?
- if this is all part of some kind of pre-nup then surely all the proposals should be going through the lawyers (albeit one with access to good tax advice);
- or if it's some last minute preparation before announcing 'it's not me, it's you' then .. actually the same applies.

Of course it may be neither scenario (just an overly cautious/pessimistic H), but then if I were the W I wouldn't see the proposal as a ringing endorsement of commitment to the marriage! Sometimes you have to consider the 'message' ...

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By Tax is always taxing
26th Feb 2024 17:09

A company created during marriage automatically becomes a matrimonial asset (in Scotland anyway), so more of a legal question.

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By clark.hall
26th Feb 2024 17:16

This is not a marriage/legal question. The husband is essentially a one-man-band. In the event of divorce yes it would be a marital assets but because he is the sole earner there's no goodwill/company if he stopped working. Divorce lawyers say this is therefore viewed as "his job" and wife would have no claim over it, aside from a claim on his income as (not a claim for her to continue holding shares).

The company expects to build up reserves and H&W agree that these should remain under his control. The intention is to usually/always pay dividends equally, but exclude W from a distribution on wind-up - if poss.

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By FactChecker
26th Feb 2024 17:54

Obviously not for us (strangers) to pass judgement, but he appears to be making a set of assumptions about the future ... such as when he disposes of the company, with marriage hopefully intact, that he won't need to make use of allowances and/or caps when utilising, say BADR, in the calculation of CGT payable.

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By paul.benny
27th Feb 2024 09:12

This sounds like an example of Client coming up with a solution and then asking Accountant to implement - rather than Client asking Accountant to suggest solutions to a problem

The scenario here would seem to be that W has no income of her own (any children?) and
- H wants to reduce their combined income tax by utilising W's nil and basic rate bands
- H also wants to protect 'his' asset (the net assets of the company) should the marriage fail.

It seems to me that those objectives involve trade-offs - reducing the tax payable now potentially makes asset protection harder. And may be other ways of achieving the objectives that change those trade-offs.

And INAL, but I wonder whether an arrangement like this from the start might be open to attack in the event of separation unless W has had independent legal advice at this stage.

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paddle steamer
By DJKL
27th Feb 2024 09:38

I am no divorce lawyer but if he has not consulted one I really think he ought, cannot see the built up capital within this company just being ignored in any division.

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By clark.hall
27th Feb 2024 10:05

Thanks for your comments. I think you're right. Shares without full rights are probably caught by the Settlement Provisions.

Include the wife in the income, you include her in the wind-up distribution.

I can perhaps soften the blow suggesting Ord A shares 51/49 + each holds separately B / C shares on which low level, occasional dividends can be paid separately. Not achieving the original objective of capital protection I know.

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By FactChecker
27th Feb 2024 16:17

".. with all my worldly goods I thee endow"*

* = 'all' has a specific meaning in this context that excludes any capital built-up, prior to or since, the marriage

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paddle steamer
By DJKL
27th Feb 2024 16:27

Better get that prenup. Frankly for ordinary mortals suggesting such arrangements to other half would likely save some money- the cost of having a wedding.

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