Alphabet Shares: What Are They And How Can They Lower Your Tax Bill?


Key takeaways

The mechanics of alphabet shares in practice

Structuring your company with alphabet shares

Alphabet shares in family businesses

Alphabet shares for employee incentivisation

Navigating tax implications and legal pitfalls

Best practice for shareholder agreements


Frequently asked questions

Alphabet shares can be a really useful tool when it comes tax planning as they can give the owners of a limited company the flexibility to take dividends independently of each other. Having the opportunity to flexibly split income has traditionally been restricted to Partnerships or Limited Liability Partnerships, but these structures often have drawbacks relating to tax planning and also business risk mitigation.

Sometimes when you have two people working together they may end up with uneven contributions to the overall business, perhaps because one works full time and the other only part or in instances where one party invested more resources into the venture.

Whilst the official tax partnership routes are available, they often force you to declare income as it’s earned rather than allowing you the more desirable option of paying tax when you withdraw money as dividends and leaving everything else in there for reinvestment or to move into holding companies.

Having different classes of share is not only useful in a partnership arrangement, but also when you want to incentivise members of your team, however there are restriction which I’ll cover later.

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Key Takeaways

  • Alphabet shares enable a company to tailor dividend distributions and voting rights among shareholders, enhancing flexibility and tax efficiency in the corporate structure.

  • Understanding and complying with regulatory requirements, such as HMRC rules and corporate governance, is essential when structuring a company using alphabet shares.

  • Shareholder agreements incorporating alphabet shares must be clear and detailed to prevent disputes and ensure that tax implications and legal pitfalls, such as anti-avoidance provisions, are addressed.

Understanding Alphabet Shares: An Overview

Alphabet shares structure

Alphabet shares significantly contribute to the flexibility of a company’s structure. When dividends paid are distributed, shareholders receive amounts based on the class of shares they possess, and each class may have distinct voting rights and dividend preferences. This tailored approach allows shareholders to manage their income tax liabilities and receive dividends from their specific share class.

Whilst most companies are incorporated with the standard “Ordinary Share” there are actually quite a few different types available, but instead of listing every iteration it makes more sense to discuss the benefits and powers a share can have:

Rights to Dividends

Dividends are a distribution of a company’s profits and are typically paid out proportionally to the shares held of the same class, for example, someone holding 60% of a class of share will receive that amount of the total dividend declared for that class.

Rights to Proceeds on Sale or Winding Up

An aspiration of many business owners is to one day sell their businesses and in that event the sale proceeds or profits left in the business after winding up the company are then distributed to the remaining shareholders based on the proportion of shares they hold.

In many cases depending on the proportion of shares held and the length of time it is possible to claim entrepreneurs relief on the sale, this 10% rate is considered generous and allows for the extraction of up to a £1m as a capital receipt.

Voting Powers

Shareholder are sometime given the opportunity to vote on certain decisions for the company, whether it relates to changes at the board level or restructuring of shares or sales thereof, having voting power can be desirable in maintaining control of the business.

It is possible to have non voting shares and these are usually the type issued to employees as part of a share incentive scheme. Sometimes shares can also come with limited voting rights attached which puts them in a restricted position but still allows the holders to be part of the company process.

Preference Rights

Certain shares have rights to dividends before they are paid to other holders of ordinary shares, and whilst directors can often issue dividends to specific classes of shares at their discretion, preferential rights override that based on the rules attached to the share.

Dividend Waiver

There are instances where a shareholder may decide to waive a dividend the company declares, perhaps because they want to avoid higher taxes and leave money in the business for growth while the other shareholders get paid. It is possible to waive a dividend and not take it, however for it to be legal the company must have had the profit reserves to pay it in the first place had they not waived it.

Examples of where alphabet shares are useful

Family members often require unique rights and privileges in family companies due to their lifestyle and specific personal goals, making share classes an useful tool for managing generational wealth.

Using an alphabet share structure can be particularly attractive in a family company as certain members earning differential dividends can be more tolerable, as long as the family has a greater take home pay altogether.

Having a new class of share can also provide an opportunity to have the owners of different share classes rank equally when it comes to receiving dividends, but then have one party prioritised in terms of the sale equity in the business.

Disadvantages of alphabet share structure

As an alternative to a limited liability partnership, smaller companies can find an alphabet share structure vital in issuing dividends in a tax efficient way. However a major draw back is that transferring shares can be complex and requires the statutory forms to be completed and filed.

This means that when the underlying sale value of a company needs to be redistributed, there can be certain complications involved and in certain cases an LLP could be considered more agile.

The Mechanics of Alphabet Shares in Practice

Mechanics of alphabet shares

The power of alphabet shares lies in their versatility, allowing companies to implement diverse dividend strategies and tailor shareholder rights. But how does this work in practice?

Diverse Dividend Strategies

The beauty of alphabet shares lies in their ability to enable different dividend rates. This flexibility accommodates potential changes in the dividends allocated to individual shareholders without necessitating alterations to the share configuration or shareholders agreement. Moreover, such shares can:

  • Enhance tax efficiency by facilitating tax-efficient payment methods

  • Ensure fair distribution of shares

  • Utilise dividends as a tax-efficient form of compensation for directors and shareholders.

Whether it’s Company A or Company B, alphabet shares can be used in diverse businesses to assign specific rights and dividend rates to shareholders, thus adding flexibility and personalisation to the corporate structure. This approach results in a more efficient and tailored shareholder income.

Tailoring Shareholder Rights

Alphabet shares not only offer financial benefits but also grant companies the ability to customize shareholder rights. For instance, they enable companies to:

  • Allocate varying voting rights to specific groups of shareholders

  • Retain control within specific groups

  • Grant certain investors greater influence over company decisions while managing their dividend income

This strategy is particularly advantageous for firms seeking to retain control within specific groups or to grant certain investors greater influence over company decisions while managing their dividend income, as it can pay dividends in the long run.

Indeed, alphabet shares can be employed to adjust board representation by assigning distinct voting and managerial rights to different classes of shares. This allows specific shareholder groups to exert a proportional or designated influence on the board, in accordance with the company’s governance strategy and the provisions outlined in the company’s articles.

Companies, including those involved in joint ventures, have effectively customized shareholder rights by utilising alphabet shares, establishing frameworks that fulfil distinct needs for voting, dividends, and board representation. In this joint venture context, Companies House, as the official registrar, plays a crucial role in maintaining transparency and accuracy of corporate information, even for businesses with just one shareholder.

Structuring Your Company with Alphabet Shares

Now that you understand the mechanics of alphabet shares better, let’s explore how to structure your company using these shares. This involves crafting the Articles of Association and ensuring compliance with regulatory requirements and proper record-keeping.

Creating the Articles of Association

The Articles of Association serve as the company’s constitution, outlining the regulations for the company’s operations and the roles and responsibilities of its directors and shareholders. When it comes to alphabet shares, it’s paramount to include provisions for assigning shareholders with different classes of shares, identifiable by alphabet letters such as ‘A’, ‘B’, ‘C’, etc.

Modifying the Model Articles of Association to accommodate alphabet shares requires passing a special resolution. This can be achieved by either amending the current articles or issuing new ones to include provisions for assigning distinct classes of shares identified by letters such as A, B, and so on. It’s vital to articulate these details in the Articles of Association, by:

  • Creating unique classes of shares

  • Designating specific rights to each class

  • Clearly distinguishing the individual rights and dividend rates in the document for each class.

Regulatory Compliance and Record-Keeping

Compliance with regulatory requirements is not optional when dealing with alphabet shares. Seeking professional advice is a necessary step to ensure alignment with tax laws and regulations. Adhering to HMRC rules and other regulatory provisions is crucial in the setup of Alphabet shares.

Beyond compliance, accurate record-keeping is fundamental. Limited companies are required to maintain a thorough record of all issued shares and their respective owners. It’s especially important when dealing with different classes of shares, such as Alphabet shares, which may confer varying voting and dividend rights. Companies should promptly update these records, especially upon the issuance of new shares.

Alphabet Shares in Family Businesses

Family businesses and alphabet shares

Family businesses often find themselves in a unique position when it comes to corporate structures. The use of alphabet shares in family businesses provides a solution to common challenges, enabling adaptability in ownership and control within the family business.

Alphabet shares enable family businesses to:

  • Improve tax efficiency by customizing dividend distributions and optimizing tax benefits

  • Establish various categories of shares, each with distinct privileges and dividend rates corresponding to the involvement of shareholders

  • Foster a sense of ownership and responsibility, strengthening the family business.

Alphabet Shares for Employee Incentivisation

Employee incentivization with alphabet shares

Not only family businesses, but other types of companies can also benefit from alphabet shares, especially in terms of incentivising employees. Alphabet shares can be an effective tool for employee motivation and alignment with business success.

Alphabet shares offer enhanced flexibility in comparison to traditional employee stock option plans due to their classification into different classes denoted by letters, such as ‘A’ ordinary, ‘B’ ordinary, ‘C’ ordinary, etc.

This arrangement enables companies to provide customised incentives to employees based on the distinct rights and dividends associated with each class, including b ordinary shares. Companies like Google have effectively utilised Alphabet shares to incentivise their employees, demonstrating the practical implementation of this strategy in the business realm.

Navigating Tax Implications and Legal Pitfalls

Despite the numerous benefits of alphabet shares, they come with their complications. Navigating the tax implications and legal pitfalls associated with these shares is vital.

Understanding HMRC’s Perspective

To avoid challenges, it’s important to understand the HMRC’s perspective on alphabet shares. Dividends from alphabet shares are usually distributed to shareholders based on their shareholding. However, HMRC may designate these dividends as employment income under specific circumstances.

Regarding settlements legislation, HMRC has stipulated that the shares should not entail any limitations, such as non-voting status or reduced capital rights. Furthermore, when shares are transferred between spouses, they are to be regarded at a ‘no gain/no loss’ value for tax purposes.

Staying Clear of Anti-Avoidance Provisions

Beyond understanding HMRC’s perspective, being aware of anti-avoidance provisions is also important. These provisions are formulated to inhibit an individual from redirecting their earnings in order to gain a tax benefit and ensure they pay tax.

To stay clear of these provisions, companies should meticulously establish their company’s articles, also known as articles of association, to precisely outline the regulations and entitlements linked to each category of shares, and verify that these provisions do not contradict settlement rules.

The UK’s HMRC anti-avoidance rules are intended to prevent individuals from diverting their income through the use of alphabet shares by ensuring that there are no restrictions on such shares, such as being non-voting or carrying lesser rights to capital.

Best Practices for Shareholder Agreements

Having comprehended the benefits, mechanics, and pitfalls of using alphabet shares, we can now delve into the best practices for shareholder agreements. These agreements play a pivotal role in preventing disputes and optimising the benefits of the alphabet shares corporate structure.

Essential considerations when creating shareholder agreements involving Alphabet shares include establishing alphabet share structures, issuing new shares, safeguarding shareholder rights, and addressing crucial matters in the agreement. To incorporate clear provisions for distinct rights among Alphabet shares in shareholder agreements, companies should set out the rights that will attach to existing shares and any new shares issued. To prevent disputes, companies can incorporate non-compete clauses, ensure clarity regarding rights, protect interests, offer pre-emption rights to existing shareholders, and establish transparent terms for share price calculations in the event of a Bad Leaver.


The landscape of corporate structures can be a complex one, but the strategic use of alphabet shares can offer a path to greater flexibility, tax efficiency, and shareholder satisfaction. By understanding the mechanics, navigating tax implications, and implementing best practices in shareholder agreements, companies can maximize the potential of this unique tool.

Frequently Asked Questions

What is the purpose of alphabet shares?

The purpose of alphabet shares is to give different groups of shareholders varying rights, such as voting rights and dividends.

What is the difference between ordinary shares and alphabet shares?

The main difference between ordinary shares and alphabet shares is that alphabet shares allow companies to separate ordinary shares into different classes by varying the prescribed particulars attached to them.

Do Alphabet shares pay dividends?

Yes they can depending on the specific rights of the shares.

How are alphabet shares typically designated?

Alphabet shares are typically designated as ‘A’ shares, ‘B’ shares, ‘C’ shares, and so on, each with its own set of rights and privileges.

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