Altering ordinary shares

[MrsKay]

Hi,

I am very new to contracting and have recently just signed up a new contract.
I would appreciate any suggestions to the following:

I have setup a new Ltd company with Companies House, with me owning 50% of the ordinary shares, and my husband the other 50%.

We would like to change the class of shares to now read me 50% of ordinary Class A shares, and my husband 50% of ordinary Class B shares.

I would like to know if I should cancel the old ordinary shares, create new classes, and then transfer the shares across? or do I have to go through the sale and purchase route?

Should I be looking at an extraordinary resolution to change this?

Many thanks,
MrsKay

[Wanderer]

I have setup a new Ltd company with Companies House, with me owning 50% of the ordinary shares, and my husband the other 50%.
We would like to change the class of shares to now read me 50% of ordinary Class A shares, and my husband 50% of ordinary Class B shares.

I presume you want to have different classes of shares so you can pay the optimum dividend amounts to yourself and your husband depending on your circumstances at the time. What you are planning to do is a called income splitting and there was a big case (Arctic Systems) where it was decided that this didn't create a settlement (so was therefore legal). However, one of the significant factors in Arctic winning the case was that the shares were "ordinary shares" which came with voting and other rights. If they had been merely a gift of income (eg preference shares) then this may be construed as a gift of income and caught by the settlements rules.

I don't know if your proposed class A and B shares would be counted as "ordinary shares" carrying the rights of a shareholder or if they would be seen as preference shares which only carried a right to income. There is potentially a LOT of money at stake here so you should get professional advice about this. Tell your advisor what you want to do and how you propose to have Class A and B shares and ask if that falls foul of the settlements legislation (or some other law).

[Clare@InTouch]

I would advise caution if the only reason for the alphabet shares is so that you can pay different dividends in order to maximise tax allowances, this is one of the warning signs that HMRC would look for when deciding whether to investigate under section 660 (income shifting).

If you want your husband to have shares and receive dividends that fine, but set it up at incorporation and keep both of you on ordinary normal shares. If you want to pay different values then you could simply issue 70 shares to you and 30 to him for example, meaning all dividends would then be split 70:30.

It depends on how bullish you want to be though - if you're happy with the risk then you can simply issue 100 shares on incorporation between you, then you split the shares after into different classes (A and B) via resolution. Your accountant could prepare the paperwork and file at Companies House.

[MrsKay]

Thank you very much Wanderer and Clare@InTouch.

The reason why I wanted me and my husband's shares to have separate right is because he has a permanent job and earns more than £36K. I would rather pay him less dividend since it will subject to higer tax.

In a separate post, I enquire about S660a (sorry I am all over the place with my posts). I just wonder if I should worry it since my contract is on 3-months rolling and they might make me permanent (well, it was discussed briefly), maybe I am being naive, if my contract only lasts 6 months, maybe the inland revenue won't be interested in me?

Many thanks,
MrsKay

[Clare@InTouch]

Thank you very much Wanderer and Clare@InTouch.

The reason why I wanted me and my husband's shares to have separate right is because he has a permanent job and earns more than £36K. I would rather pay him less dividend since it will subject to higer tax.

In a separate post, I enquire about S660a (sorry I am all over the place with my posts). I just wonder if I should worry it since my contract is on 3-months rolling and they might make me permanent (well, it was discussed briefly), maybe I am being naive, if my contract only lasts 6 months, maybe the inland revenue won't be interested in me?

Many thanks,
MrsKay

3-6 months may mean you have less exposure, but there's no de-minimus limit with HMRC and they still may look into the tax returns. Having alphabet shares with different rights will leave you more at risk, and unless you have a lot to gain then in my view it's not worth it. You can still do it of course, it's entirely up to you!

With your husband on over £36k then you don't stand to gain that much though - he could take a dividend of say £5,800, assuming he's on £36k and has no other income, which would save you higher rate tax of around £1,400. If he's earning over £36k then that saving drops lower and lower...


EDIT - just seen your other thread where you say your husband earns over £60k. In that case there's no benefit to him being a shareholder at all.