The use of alphabet shares can be an excellent way of paying dividends to key employees or family members which are not in proportion to their actual ownership of the company. As dividends are usually more tax efficient than salary, significant tax savings can be made as a result of an appropriately structured company.
Whilst it is possible to achieve a similar result using dividend waivers, these can be rather messy and can create legal and accounting problems if great care is not taken.
Moreover, as their name suggests, other shareholders in the same class would have to waive their right to a dividend.
If, instead each shareholder has their own class of shares, typically designated by a letter of the alphabet, this gives the directors much more freedom to pay different rates of dividend on the different classes.
For example, if there are five shareholders and they each own all the shares in their class A to E, the directors could pay a dividend on the A class only without requiring the approval of the shareholders of the other shareholder classes, assuming appropriately worded articles. This can have enormous tax advantages when it comes to rewarding staff.
Care should be taken not to make staff contractually eligible to receive a dividend – otherwise it could be treated as normal remuneration and taxed and subjected to NIC as normal.
If employees are gifted shares or shares are subscribed for and a nominal amount paid then the values of these shares are subject to income tax. However, by using a shares valuation expert it is often possible to give the shares such a low value that only a minimal amount of tax is payable. If a shareholder gifts shares to a family member it is possible to do this without any income tax at all.
Setting up alphabet shares typically requires amendment to a company’s articles of association. However, the potential tax savings can wipe out these administrative costs very quickly.
For more information on this please contact Nigel Holmes on 01228 690200 or email firstname.lastname@example.org
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