Reply to: Question about "alphabet shares"

[Amanensia]

I would be very relaxed about making gifts of shares (or anything else) to a bona fide spouse - no need for dressing it up as a purchase. I'd feel much safer doing that than having multiple share classes. Having said that I'd probably avoid making frequent gifts in opposite directions to continually rebalance shareholdings, just because it looks dodgy, and it's best not to attract attention.

Incidentally for a typical contractor company fair value is usually deemed to be simply net assets multiplied by shareholding percentage.

[eek]

So she can gift the shares back if she wants to? I did ask the solicitor if this was possible as one off in the future and he said it was. If this is feasible then there is no reason to create an additional share class.



The example says that "the shares have no rights other than that the employer can award dividends at his discretion." That is a different scenario and all advice and articles clearly state the ordinary shares must have the same rights.

You've asked a question and seem happy to ignore the sensible answers all of which point to not doing something you seem desperate to do for no sane reason against your accountants advice.

For that reason I'm out and will place you on ignore.

[northernladuk]

So she can gift the shares back if she wants to? I did ask the solicitor if this was possible as one off in the future and he said it was. If this is feasible then there is no reason to create an additional share class.

Yes but be-careful with gifting. They should really be sold back at a reasonable price but feck knows what that is.

And yes, there is no reason to create the different class.

But if this is making your head spin with joy and loads of dubious situations are coming to mind then don't. It has to be done properly and carefully.

[concord]

So she can gift the shares back if she wants to? I did ask the solicitor if this was possible as one off in the future and he said it was. If this is feasible then there is no reason to create an additional share class.

You might want to ask your adviser about example 3 "alphabet soup".

The example says that "the shares have no rights other than that the employer can award dividends at his discretion." That is a different scenario and all advice and articles clearly state the ordinary shares must have the same rights.

[Iliketax]

In time it may not make sense for her to be a director and shareholder any longer. This is the only reason why I am considering alphabet shares.

You might want to ask your adviser about example 3 "alphabet soup" here: ERSM60030 - Employment Related Securities Manual - HMRC internal manual - GOV.UK When you do, ask them what the highest marginal tax rate is (bearing in mind s222).

[northernladuk]

How can this be done?

Say my spouse decides that when the children are older that she wants to return to work. In time it may not make sense for her to be a director and shareholder any longer. This is the only reason why I am considering alphabet shares.

Thanks.

So buy the shares back off her. Fill in a form detailing the adjustment of shares and away you go.
Better still get your accountant to do it.

Just don't do it regularly to attract any unwanted attention.

[malvolio]

How can this be done?

Say my spouse decides that when the children are older that she wants to return to work. In time it may not make sense for her to be a director and shareholder any longer. This is the only reason why I am considering alphabet shares.

Thanks.

You pay dividends out in whatever ratio you want to apply from that point on. On your annual Companies House return you update the shareholding record (or do it immediately if you want). Works in both directions.

And you don't have to be a director (or any other officer of the company) to be a shareholder.

[concord]

And think about why you would need flexibility - you can, if necessary (and I struggle to see why in your position), change the share split with very little effort at any time

How can this be done?

Say my spouse decides that when the children are older that she wants to return to work. In time it may not make sense for her to be a director and shareholder any longer. This is the only reason why I am considering alphabet shares.

Thanks.

[eek]

If multiple classes of ordinary share classes are created with the same exact rights, is the difference substantial enough for precedent not to apply? They are different but the rest of quoted statement still applies. This seems to be the view in this article on AccountingWEB.

Yes - only 1 model has been tested where shares of the same class have been used.

Shares of different classes open up an entire world of research and tax tribunals for you to investigate, you may want to look at the tax tribunal cases where dividends have been wavered to see why HMRC dislike them so much.

[malvolio]

Many thanks for all your replies. I'm generally a risk averse person but I want to make a well-reasoned decision.

The most interesting point is when the Arctic Systems decision is brought up. For example:



If multiple classes of ordinary share classes are created with the same exact rights, is the difference substantial enough for precedent not to apply? They are different but the rest of quoted statement still applies. This seems to be the view in this article on AccountingWEB.

I don't intend for the company to pay different rates but reserving the flexibility is attractive. I'll reach out to another accountant to get an opinion and then make a decision.

Once again, thank you for your thoughts.

OK, but ask one who properly understands Arctic and its implications. And think about why you would need flexibility - you can, if necessary (and I struggle to see why in your position), change the share split with very little effort at any time

[concord]

Many thanks for all your replies. I'm generally a risk averse person but I want to make a well-reasoned decision.

The most interesting point is when the Arctic Systems decision is brought up. For example:

A fairly key part of the Arctic Systems case was that the wife's shares were exactly the same as the husband's. Therefore legally she wasn't just being given a right to income, she also had legal voting rights no lower/different to his. It was no more his company than it was hers.

If multiple classes of ordinary share classes are created with the same exact rights, is the difference substantial enough for precedent not to apply? They are different but the rest of quoted statement still applies. This seems to be the view in this article on AccountingWEB.

I don't intend for the company to pay different rates but reserving the flexibility is attractive. I'll reach out to another accountant to get an opinion and then make a decision.

Once again, thank you for your thoughts.

[Maslins]

For me it's back to the Arctic case but a slighly different reasoning.

In the case of Arctic, income shifting is allowed for equal class of shares. On that basis income shifting different classes is not something tested and proven to be OK.

This is basically my view too. Legal waffly explanation from a non lawyer below:

It's rarely as simple as "is it legal or not". There's primary legislation, reams of it, that covers loads of different things. Inevitably you end up with some situations where one part of the legislation suggests X, another part suggests Y. This is where cases can end up going to Court, with taxpayer insisting X should apply, HMRC insisting Y should apply. A judge rules one way or the other, explaining their reasoning, and that forms case law. This then sets a precedent for identical situations, unless overruled by a higher court.

Inevitably there will be situations where something is similar to a historic piece of case law, but not identical. This means you can't guarantee relying on the case law, as the facts are a bit different. Inevitably different advisers will have different views on what might then apply.

A fairly key part of the Arctic Systems case was that the wife's shares were exactly the same as the husband's. Therefore legally she wasn't just being given a right to income, she also had legal voting rights no lower/different to his. It was no more his company than it was hers.

By issuing different share classes to a spouse, by definition you're demonstrating you consider the shares one spouse owns to be different to those owned by the other spouse. I therefore don't see safety that it's bound by the decision in Arctic Systems.

Others will take a different view, plus of course plenty of situations there will be something done that is "wrong", but they get away with it. Either because HMRC don't know, or perhaps HMRC do know but don't have the resources to pursue.

[Lance]

Go back to the Arctic case. In essence you don't need to faff around with classes of shares; the whole point is that you and your wife share the risks as well as the benefits, so a basic share split is perfectly valid. Adding complexity to a simple situation merely marks you out as doing somehting to avoid taxes rather than for some purely business reason.

So why bother...?

For me it's back to the Arctic case but a slighly different reasoning.

In the case of Arctic, income shifting is allowed for equal class of shares. On that basis income shifting different classes is not something tested and proven to be OK.

[Amanensia]

I know many contractors that haven't a clue about IR35, have house extensions paid by the company, paid for telly's etc via expenses, have their dog on the payroll and so on. They've not had issues so far as well.

This is not a good yardstick at all.

I'm not saying it is! As I made clear in the rest of my post, it's not something I have done or would do.

[northernladuk]

I know many other contractors that use different share classes for spouses in order to declare separate dividends. None of them have had any issues with this but I've never bothered with it, on the basis that I didn't think it was likely I'd ever need the flexibility and it just looked like the sort of thing that might raise HMRCs interest, even if it's "legal."

I know many contractors that haven't a clue about IR35, have house extensions paid by the company, paid for telly's etc via expenses, have their dog on the payroll and so on. They've not had issues so far as well.

This is not a good yardstick at all.