ANY ANSWERS: The ABC of alphabet shares. By Nichola Ross Martin

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There is a regular flow of questions on Any Answers regarding shares and dividends. Nichola Ross Martin draws them together.

ABC shares can be very useful for SME owners - they allow different rates of dividends to be paid, and are more flexible than dividend waivers. However, recent legislation has limited their use in providing employees with a source of NIC free income. So are they are still something to be considered when forming a new company?

Alphabet shares are just shares of different classes, often set up as 'A' shares, 'B' shares, 'C' shares, etc. The classes often all rank in 'pari passu' with each other (this means that they have an equal footing; for example, the same voting and rights on winding up). But they may also carry different rights, for instance entitlement to a...

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By Anonymous
20th Jun 2006 12:52

Sorry, I made it sound ambiguous.
You make an election under s.431 to value them on an unrestricted basis - this gives a higher value than on a restricted basis, although I gather that SV have other ideas about what exactly a restricted basis means.

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08th Jan 2014 12:45

dividend waiver or alphabet shares

I have a company with three shareholders. The father and son own 75% and the 25% shareholder/director is non family. At the moment his dividend is £10,000 per year and as the director doing all the work for the company is high salary takes him into the higher tax bracket. Would it be legal for the father and son shareholders to waive part or all their dividends and for the non family shareholder to reduce his salary to £10,000 per year and to take a net dividend of £27,000? The distributable profits are about £40,000 per year although there profits in reserve that have not been distributed.

If I cannot raise the dividend legally as above would the only way of getting the 25% shareholder a more tax efficient share of the profits be for the father and son to transfer some of their shares to the non family member? Obviously they would not want to lose control of the company.

Do I understand rightly?:-

1) The family directors keep their 75% shareholding and the non family still has his 25% shareholding of the now Ordinary A shares.

2) The non family member then receives non voting/ non share of value of company winding up value Ordinary B shares. He gets 75% of these shares. The family members take 25% Ordinary B shares.

When the results are known the shareholders vote no dividend to the Ordinary A shares and vote £36,000 to the Ordinary B shares. This then results in the non family shareholder, who is also a working director taking on at least 75% of the workload of all 3 director/ shareholders, receiving a dividend of £27,000 and the 2 family members then receive a dividend of £4,500 each. By doing this the company ends up with more taxable income and takes both of the 2 family shareholders out of the higher tax bracket. The 2 family directors are also director/shareholders of another limited company which is completely family controlled.

 

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30th Jan 2018 13:05

The ABC of alphabet shares. By Nichola Ross Martin

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