Alphabet Shares Structure Planning - Is It Worth?

An alphabet share structure, also known as alphabet shares, is a type of share structure where each shareholder holds a different class of shares. For example, one shareholder may have A ordinary shares, another B ordinary shares, and so on. This structure offers the advantage of flexibility in tailoring dividends to meet the specific needs of individual shareholders.

This is particularly beneficial in family companies, as it allows for the distribution of dividends to be customized based on personal circumstances. Additionally, alphabet share structures enable companies to bypass the legal requirement of paying dividends in proportion to shareholdings, providing greater flexibility and control over dividend distributions.

Utilising the dividend allowance?

An advantage of an alphabet share structure is that it allows for the allocation of dividends to shareholders who work outside the family company and have not fully utilized their dividend allowance for the tax year.

This enables the maximization of tax-free profits by utilizing the available dividend allowances. This structure provides flexibility and tax efficiency for shareholders with varying levels of involvement in the company.?

The dividend allowance, which allows individuals to receive a certain amount of dividends tax-free, is being gradually reduced. For the 2022/23 tax year, the allowance was ￡2,000, but it will decrease to ￡1,000 for 2023/24 and further to ￡500 for 2024/25.

This means that individuals, particularly those with shares in family companies, will see a reduction in the amount of tax-free profits they can extract through dividends.

For example, in a family company with four shareholders, the tax-free profit extraction potential will decrease from ￡8,000 in 2022/23 to just ￡2,000 in 2024/25. This change will impact the tax planning strategies of affected individuals and entities.

Using lower tax bands?

The reduction in the dividend allowance may limit the ability to extract profit free of further tax, but having an alphabet share structure in place can still be advantageous. This is especially true if the shareholders have different marginal tax rates, as it allows for tailoring dividends to be taxed at the lowest possible rate.

For the 2023/24 tax year, dividends are taxed at 8.75% in the basic rate band, 33.75% in the higher rate band, and 39.35% in the additional rate band. This means that careful planning and allocation of dividends can result in tax savings for shareholders with differing tax rates.?

Example

Nick, Liz, and Samual are shareholders in XYZ Ltd. Each holds 100 ordinary shares of a different class - A, B, and C. This distribution allows for different voting rights and dividend preferences among the shareholders.

For 2023/24 the company has profits of ￡45,000 that they wish to extract. Nick has another job and is an additional rate taxpayer. Liz has an income from property of ￡35,270 a year and Samual has an income of ￡20,270 from her part-time job. They all have their dividend allowance available.?

In an effort to minimize tax liability, the company has declared different dividend amounts for each class of ordinary shares. A ordinary shares will receive a dividend of ￡10 per share, B ordinary shares will receive ￡150 per share, and C ordinary shares will receive ￡290 per share.

Nick receives a dividend of ￡1,000. This is sheltered by his dividend allowance and is tax-free.?

Liz has received a dividend of ￡15,000, with ￡1,000 being tax-free due to her dividend allowance. The remaining ￡14,000 is subject to the dividend ordinary rate of 8.75%, resulting in a tax bill of ￡1,225. This amount also uses up her remaining basic rate band.

Samual received a dividend of ￡29,000, with ￡1,000 being tax-free due to the dividend allowance. The remaining ￡28,000 is within the basic rate band and subjected to a tax rate of 8.75%, resulting in a tax bill of ￡2,450. Overall, Samual received a net dividend of ￡26,550.

The total tax bill is ￡3,675.?

In this scenario, if each taxpayer received a dividend of ￡15,000, the total tax bill would have been ￡7,959. However, by structuring their shares alphabetically, they were able to tailor the dividends in such a way that they were able to reduce the total tax bill by ￡4,284. Nick would pay tax on ￡14,000 of his dividend at 39.35%, while Liz and Samual would each pay tax at 8.75% on ￡14,000 of their dividend, with the remaining ￡1,000 of each dividend being sheltered by the dividend allowance.

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