Glossary · UK
What is Alphabet Shares?
Multiple classes of ordinary shares (A, B, C etc.) in a company that allow the directors to declare different dividend amounts per class, often used in family companies for flexible income splitting.
Full Definition
Alphabet shares are different classes of ordinary shares -- typically labelled A ordinary, B ordinary, C ordinary and so on -- that carry identical rights in all economic respects except that the directors have discretion to declare separate dividends on each class independently. This flexibility allows a family-owned company to pay a dividend on one class but not another in a given year, enabling the couple or family members who own different classes to receive dividends in different amounts or not at all. For example, a higher-rate-taxpaying director might hold A shares and receive no dividend in a year when the company has profits, while their basic-rate-taxpaying spouse holding B shares receives the full dividend. The tax saving can be substantial. However, HMRC is alert to arrangements that are designed solely to divert income from the person who earned it to a lower-tax associate. The settlements legislation (formerly known as the S660A rules, now found in ITTOIA 2005) can apply to treat the waived or foregone income as belonging to the original earner. The landmark Arctic Systems case (Jones v Garnett 2007) established that modest dividends paid to a non-working spouse on genuinely commercially structured shares are generally acceptable, but aggressive arrangements -- particularly involving minimal contribution by the lower-taxed shareholder -- remain at risk.