Tax Traps of Different Classes of Shares in Family Companies

Creating new share classes in a family company can be a strategic way to split income among family members, but it comes with its own set of tax considerations.

This week, we look at the key tax consequences, anti-avoidance provisions, and statutory requirements involved in such a process.

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(Read Time: Approx. 3 minutes)

Topics Discussed:

• Tax consequences and statutory requirements of creating new share classes.
• Anti-avoidance provisions and potential tax charges in family companies.

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Tax and National Insurance Contributions (NICs) for Alphabet Shares

Private companies often start with a single class of ordinary shares.

However, new share classes can be created, subject to the company’s Articles and board of directors’ consent.

These new classes allow the board to vote dividends at different rates but introducing new share classes for family members can bring about several tax issues.

1. Capital Gains Tax (CGT): Changes to CGT Business Asset Disposal Relief affect the disposal of shares with different rights, effective from 29 October 2018.
2. Dividends and NICs: The dividends declared on different share classes can affect the overall tax liability of the company and its shareholders.

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Anti-Avoidance Provision

Several anti-avoidance provisions can result in unexpected tax charges when new share classes are issued:

• Non-voting shares to spouses or minor children: These shares can trigger anti-avoidance rules if dividends are disproportionate to other shareholders.

• Dividend waivers: Waiving dividends in favour of another family member, especially minor children, can lead to settlements treated as if the original owner retained the income.

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Tax Changes (2023-24)

Updated tax rates and allowances impact the issuance and management of shares:

• CGT Annual Exemption: Reduced to £6,000 from April 2023 and to £3,000 from April 2024.

• Dividend Tax Allowance: Reduced to £1,000 from April 2023 and to £500 from April 2024.

• Corporation Tax: Main rate increased to 25% from 1 April 2023.

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Statutory Requirements: Changes to the Articles

Before altering share capital, the company’s Articles must be reviewed and possibly amended. The process includes:

• Issuing New Shares: New shares can be issued following the process set out in the Articles, often via an ordinary resolution.

• Pre-emption Rights: Consider these rights to prevent dilution of existing shareholders’ stakes.

• Authority to Allot Shares: Board authorisation may be required to issue new share classes.

Changes to the Articles might involve reclassifying existing shares or creating new ones, ensuring that shareholder rights, such as transfer restrictions, are clear.

These changes must be filed with Companies House.

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Authorised Share Capital

Companies incorporated before October 2009 have an authorised share capital, which can be changed via an ordinary or special resolution.

Post-2006 companies do not have this restriction but must resolve to issue new shares every five years.

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Pre-emption Rights

Existing shareholders have statutory pre-emption rights on new shares, which can be excluded by special resolution.

These rights typically do not apply to bonus shares or employee share scheme shares, depending on the Articles.

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Practical Considerations and Planning Points

Creating new share classes can offer flexibility in dividend payments and capital allocation.

Alphabet shares allow different dividend rights while maintaining equal voting rights. However, the tax implications must be carefully considered to avoid falling foul of anti-avoidance rules and ensuring compliance with CGT and NIC regulations.

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Summary

Issuing different classes of shares in a family company can be beneficial but requires thorough planning and awareness of tax implications.

Take the next step in optimising your company structure for tax efficiency.

At Tax Expert, we specialise in company structures and share division to ensure the most tax-efficient outcomes for your family business.

Reach out to us today and let our experienced team guide you through the complexities of creating new share classes with confidence and expertise.

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Contact us today at 01772 788200 to find out more about how we can help, or WhatsApp us out-of-hours at 07787 010190.

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Kind regards,

Ilyas Patel