Your company’s share structure can provide a robust framework for extracting dividends in the most tax-efficient manner for your family, attracting investment into the business, and securing key employees within the organisation.
Traditionally, a company is set up with one share class, with the majority of the shares held by the company’s founder. Typically, shares are issued to a spouse in a proportion that maximises their combined basic rate tax band.
As the business grows, one strategy to consider is share reclassification.
What is Share reclassification?
Share reclassification is changing the rights of shares within a company. This process can involve either issuing new shares or reclassifying existing shares. Essentially, you are renaming or relabelling a group of shares.
Why would I reclassify shares within my business?
1. Tax Efficiency and Dividend Flexibility
Creating different share classes can enable shareholders to extract remuneration from the business in the most tax-efficient way for their specific circumstances.
For example, a Limited company may have two shareholders, one who wants to maximise income and one who is focused on creating wealth. Having different share classes will enable both shareholders to have the same voting rights but receive different dividends, allowing one shareholder to receive £100,000 in dividends. The other could receive £ 40,000 in dividends, and the company can pay £ 60,000 in pensions as an employer’s contribution*.
The same principle can apply to spouses implementing an alphabet structure, which enables dividends to be paid flexibly each year, thereby maximising the family tax position.
2. Succession Planning and Business Continuity
Part of your business’s succession planning may involve bringing key employees into ownership of the business, or it can help provide a structure for passing the business on to the next generation. Reclassifying or creating a new class of shares provides flexibility over whether they have voting and/or dividend rights, allowing them to be tailored to the needs of your business.
3. Raising Investment
One frustration an owner may have whilst looking for investment is the need to raise capital but not wanting to relinquish control. Share reclassification can provide a flexible structure that allows:
a. Non-voting shares – Investors who wish to remain silent but want a return on their capital based on the company’s growth in value.
b. Preference shares – investors who want a fixed rate of return on their investment
c. Alphabet shares – enabling active shareholders to receive different dividends to non-active shareholders
4. Employee Incentives and Retention
Retaining talent is a key issue in the UK, and it is becoming more popular to involve key employees as shareholders of the business. Share reclassification can be a key way to do this. One example of this is the issue of Growth Shares, where employees share in the business’s growth, but existing shareholders retain the capital value they have worked hard to build to date.
How do I reclassify shares?
A share reorganisation is a lot more complicated than sending a form across to Companies House; the following needs to be considered:
- Amending the Company’s Articles of Association – these need to be amended to allow the new share class. Model articles typically only allow one class of shares
- Passing a special resolution – majority shareholders’ approval is needed
- HMRC Compliance – there could be tax implications if a share reclassification is not completed properly
It is not a matter of simply filing a couple of forms with Companies House; it is crucial to consult with an accountant or solicitor before implementing any changes.
Conclusion
A share reclassification can be a beneficial strategy to be more tax efficient, gain investment in your company or retain key members of your team. As each class of shares could have different voting, dividend and capital rights, a share reclassification can provide a structure tailored to your business needs.
If you are considering a share reclassification, it is essential that you consult with your accountant or legal advisor to ensure it is legally compliant, that there are no unexpected tax implications, and that it aligns with your future growth plans.
