Share class restructure

[Adam Stokes]

My business partner and I are currently in discussions around restructuring share classes. He would like to restructure the share classes so he can receive dividends that more closely align with what I receive through my director’s salary. His aim is to achieve a more balanced take-home income after tax, given that he’s based in Italy and faces a higher personal tax burden on dividends, and even higher on PAYE/invoicing the company.

While I understand his position, I’m concerned about whether this kind of share class change, especially if the main purpose is to balance out personal tax (instead of invoicing/PAYE), could be viewed as tax avoidance by HMRC/authorities. I want to make sure we’re acting in good faith and not exposing the company to any risk. I'm also concerned it may open myself up to additional risk which require legal agreements to keep things in check.

Has anyone here had experience with restructuring share classes to balance out tax situations? What are the potential pitfalls or governance concerns to watch out for?

 

[Daybooks]

The share structure should reflect the commercial reality because as you rightly consider if it is done purely for tax reason then at least as far as HMRC are concerned it may fall into settlements legislation.

If you think you will make a profit of 100 and thus plan to pay yourselves a salary of 50 each, then all things being equal why should that figure change simply because of tax variations in different countries? You are not responsible for the tax laws in another country anymore than one UK based director should receive less than another UK director simply because one director has a marginal higher rate of tax than the other.

You could use preference shares. This may work if they are genuinely arms length and commercial. There are numerous options for this but the may have unforeseen consequences in terms of possibly not being considered as ordinary share capital for business asset disposal relief. Alphabet shares are another option; whilst they can work, in many cases and especially if not created on incorporation, they are usually done for the purposes of tax efficiency and thus possibly subject to the settlement legislation. My view only but as a shareholder why would you want a share class that might not get a dividend when another does?

Obviously it is the choice for the shareholders; if it were me I wouldn’t agree to any change.

 

[Paul Kelly ICHYB]

Why don't you both take dividends only, so the gross amount is the same?

 

[Adam Stokes]

Why don't you both take dividends only, so the gross amount is the same?

Taking only dividends will mean I wouldn't get the benefits of my tax-free allowance, also affects the company with higher tax to pay.

 

[Ziggy2024]

Taking only dividends will mean I wouldn't get the benefits of my tax-free allowance, also affects the company with higher tax to pay.

You can use your personal allowance against dividends, you don't lose it.

Alphabet shares are the way to go here, make sure that you have a solid shareholders agreement in place and you should be fine.

As you have noted, the consequences would be higher corporation tax.

 

[Serial4]

Hello,
My question is similar-ish.
I am 50-50 partner in our LTD. There are 100 ordinary shares allocated equally 50-50.
How to set up our shares so legal rights regarding decision making and all stay the same, but he could take significantly more dividends out of the business than myself. Also not to have a fixed ratio like 25 shares to me and 75. Simply he could take whatever and myself whatever left.
What is the process of setting this up? Where to submit what exactly? I have access to filing for my company and done it before, just not sure if this is requiring some extra steps?
Hope I could explain what I am after, and thank you all in advance.

 

[DWS]

Not straight forward at all, first of all you need to check that the Companies articles allow it, you may need to pass special and ordinary resolutions as well as adopting new articles.
There are then forms to fill in and submit to CH.
I would advise getting your Accountant involved in this or engaging a formation Company as if not done correctly mistakes could be very costly.

 

[Serial4]

Hello DWS,
Thank you for the advice.
Will check with accountant.
Kind regards,
M

 

[The Resolver]

For both @Adam Stokes and @Sedrial4

I would be surprised if an alphabet share change was seen by HMRC as coming withinhe General Anti-Abuse Rule.
GAAR is targeted at artificial or contrived schemes with absolutely no commercial/corporate merit.
Arranging the division of profit between two shareholders by agreement on a year to year basis (which could be to reflect a variation of time spent/type of contribution etc., does not amount to a scheme, G|AAR is focused on schemes with their own inherent effect not something that requires a decision on an annual basis, Its the scheme not primarily the decisions they look at,

The decision on profit distribution Is one that is itself subject to its own rules ,
i.e. to ensure the dividends are legally distributable as profit.But of course take advice from a tax accountant with experience of GAAR cases.

As @Ziggy2024 says, and given that you need consensus on a year to year basis, you need to ensure a solid and bespoke, not generic, Shareholders Agreement. (SHA) . Perhaps as additional security against a GAAR ruling the SHA could include a formula that determines the share out between the the two share classes. If you call me I can talk you through ways of setting out the SHA