Reply to: Dividends - adding my wife as shareholder

[TheCyclingProgrammer]

WIB is right of course, the part he quoted from my post is only valid if spouse is unemployed or well within the basic rate band.

[WordIsBond]

Alphabet shares are legal. If they are being used for a business purpose (as I do in my company) there's not a thing wrong with them. For most one man bands, there isn't a business purpose, and that can make HMRC suspicious that they are being used for an illegal income settlement. If they aren't being used that way, you are probably fine. But it looks particularly suspicious if they don't have equal voting rights, etc. If you play games with the rights the shares have, they are going to think you are just using alphabet shares to settle income, rather than to denote ownership, and if you do that, you are likely to come under scrutiny. And if they think you are doing something shady with alphabet shares, I'd suppose they will then be likely to investigate you for other things, like IR35, as well.

So the guys who say, "Don't use them at all, everyone advises against it," are overstating the case. It's rather more nuanced than that, as TCP has noted.

That said, I'm not so sure about this one:

Having said all that, whilst I can see alphabet shares being a useful way of only paying a spouse £5k to stay within the tax limit, its surely still more tax efficient and simpler to just give your spouse an ordinary shareholding (it doesn't have to be 50/50 - it could be 75/25) and split the dividends normally. Even if your spouse ends up paying some tax on the dividends (7.5% above the £5k limit + £11k personal tax allowance) its much less than you'd pay if you'd taken the dividends yourself and paid higher rate tax.

OP's spouse is employed, and could be in the higher rate band, or close to the higher rate band. If so, any excess dividends paid over £5K could actually end up incurring higher rate tax.

I'd agree entirely if the spouse is unemployed, or working at a relatively low salary and not approaching higher rate band. OP didn't tell us what his other half was making, so the advice may have been golden, but in some cases it wouldn't.

[sal]

I believe the risk with alphabet shares stems from the fact that their use for income split between spouses hasn't been challenged by HMRC in court unlike the "normal" shares split. Although it's perfectly legal to use them atm, there is a slight risk of problems in the future. Every business owner needs to weight the risk and do whatever is best for their business.

[missinggreenfields]

Which reads to me as best avoid and do properly with normal shares.

Oh dear...

[northernladuk]

Which reads to me as best avoid and do properly with normal shares.

[TheCyclingProgrammer]

I may have it wrong, but I had always been of the belief that to use alphabet shares the A class shares dictate ownership, and the B class ones were used for dividends.
So with one person having all A class shares I had assumed 100% ownership.

Not necessarily. Different classes of shares can have different rights (including dividend rights) but can confer equal rights of ownership and capital rights on winding up.

There's another article here on alphabet shares:
http://www.accountingweb.co.uk/busin...-details-right

TLDR; get an accountant and get tax investigation insurance as backup.

IMO, the risk here is that HMRC see this as a new easy target. They haven't shown much interest in pursuing settlements-related cases since they lost Arctic (yes, I know there have been a few notable cases regarding waivers and trusts) and after the family business tax idea was scrapped and the principle of the spouse exemption was clarified my feeling is that HMRC have moved on to easier, more rewarding targets (EBTs, avoidance schemes etc.) and that other than the obvious established principles, the settlements legislation is not the big risk it was once considered...however...

...there were some grey areas that remain unexplored (income splitting between non-spouses, alphabet shares).Tthere's always a risk that HMRC could start poking around again and if alphabet shares suddenly get very popular off the back of the dividend tax then maybe that might convince them to start looking more closely.

[missinggreenfields]

I may have it wrong, but I had always been of the belief that to use alphabet shares the A class shares dictate ownership, and the B class ones were used for dividends.

There's no "may" about it. You do have it wrong.

[missinggreenfields]

You did. Persons of significant control.

No, I said that it's in the PSC Register [which details who holds shares in the company]. I didn't say that it was anything to do with control.

[Lance]

Must admit I'm not quite sure what Lance or NLUK are trying to say here.

If mgf has two classes of ordinary share, A and B, both equivalent in all but name and him and his spouse have 50 shares each, then they do indeed have a 50/50 split of the company shareholding.

I may have it wrong, but I had always been of the belief that to use alphabet shares the A class shares dictate ownership, and the B class ones were used for dividends.
So with one person having all A class shares I had assumed 100% ownership.

[Lance]

Nothing - who mentioned control?

You did. Persons of significant control.

[TheCyclingProgrammer]

Must admit I'm not quite sure what Lance or NLUK are trying to say here.

If mgf has two classes of ordinary share, A and B, both equivalent in all but name and him and his spouse have 50 shares each, then they do indeed have a 50/50 split of the company shareholding.

As they are technically two different classes of share, then dividends can be paid out on one class but not the other.

AFAICT, the main risk arises where, for example, you've paid £x dividends to take you up to the higher rate threshold but your spouse still has unused basic rate allowance so you pay a dividend out on their class of share only to use up the rest of their basic rate amount. I'm not sure if HMRC have actually challenged the use of alphabet shares in this way as they have with waivers so I'm unsure of the exact details, but as has been pointed out this is something to be wary of and it is on HMRC's radar.

If you're using alphabet shares to pay yourself in the usual way but *restrict* the amount of dividends your spouse receives (because you don't want to go over the £5k dividend allowance, for example), rather than increase the amount they receive, I'm not sure this is an issue and is probably the approach being recommended by accountants in response to the new dividend tax. You could limit your spouse's dividends to £5k but still enable them to own half of the company which could have further tax benefits in the future (e.g. double the CGT allowance on any capital gain on liquidation).

I'm not standing up as an advocate for alphabet shares here, just that I think it can be a valid approach in some circumstances (but you should absolutely get professional advice as there is scope for making a mess of this).

[missinggreenfields]

what has control got to do with ownership?

Nothing - who mentioned control?

However, the PSC register details who holds shares in the company, either directly or indirectly.

What does the shareholder declaration say?

Class of shares: A Ordinary
Number allotted: 50
Each share has full rights in the company with respect to voting, dividends and distributions.

Class of shares: B Ordinary
Number allotted: 50
Each share has full rights in the company with respect to voting, dividends and distributions.

Total number of shares: 100
Total aggregate nominal value: 100

[missinggreenfields]

As I said it depends on the details and lo and behold more details appear....

Apologies - I'd presumed that it would be sufficient to say "I followed their advice" and you would understand what I had done. I didn't realise that you needed more details than that given their advice was on their website. The only detail that I added is the irrelvant line about not paying any dividends yet, but next time I'll copy the article and stick that in here if that will help you.

In all the articles it talks about 'less risky' so why not do it as mentioned in TCP's post.

Because that way has no flexibility built into it, both in terms of timing and amount to be paid. I like to have as few constraints on my business as possible.

With so many ifs and buts around it it's not unreasonable to expect it to attract more attention than a normal set up and I don't deny you'll probably get away with it but the experience won't be pleasant if they come looking.

What specifically do you think I am getting away with?

[Lance]

Not according to the PSC register at Companies House.

what has control got to do with ownership?
What does the shareholder declaration say?

[northernladuk]

Not according to the PSC register at Companies House.

Are you sure it makes the distinctions between rights and classes not just a flat count of shares issued which isn't truly the case? The CompanyCheck site doesn't do a very good job of this. Might be different if you are a paid member.