Class B shares and how you can save £1000
07 Jun 2016
Tax Smart Group explain Class B Shares and its relevance to Contractors
Before looking at Class B shares we must clear up the two main types of shares that exist in a limited company – Ordinary Shares and Preference Shares. The main difference between these two types of shares is that Preference Shares carry a right to be paid Dividends before Ordinary Shareholders.
Both Ordinary Shares and Preference Shares have the option to be issued under various classes (also known as alphabet shares) and Class A Ordinary Shares are what most contractors receive when they setup their limited company, but it is possible to issue the same type of shares but with a different Class e.g. Class B Ordinary Shares or Class C Ordinary Shares.
What is the difference in the various amounts that are issued?
A quick side note here is that often 1,10,or 100 shares are issued. Some quick desktop research will confirm that there is a difference between 1 and 10 but no difference between 10 and 100. We at Tax Smart Group typically recommend 10 Ordinary Class A shares to all our clients. Feel free to contact us to find out why.
So, now that you have your 10 Class A Ordinary Shares why would you issue any more alphabet shares (Class B Ordinary Shares)?
The answer is simple – for better tax planning without the liabilities – by issuing 10 Class B Shares to your spouse, you can pay them £5000 tax free dividends per annum.
So why not simply issue Class A shares?
True, you can issue lets say 5 Ordinary Class A Shares to each person (Director and Spouse) at the initial setup but then you would have to issue equal dividends to each shareholder and you may not want to do that.
Therefore you can stipulate the following when issuing alphabet shares such as the following examples:
Class B – £5000 dividend rights.
Class C – £2000 dividend rights.
Hopefully you should understand that issuing alphabet shares can help you to take advantage of all your spouses (and their tax-free dividend allowance of £5000) and if your wondering – you can issue shares to any person – although to avoid technicalities (and HMRC) it is advisable to issue shares to spouses over 18.
With the right setup, a married couple can reduce their tax liability by £1000 without the Director giving up any control or any other tax liabilities being generated by using Class B Shares over Class A shares which most accountants advise.
Please note that the best plan varies from each individual based on their circumstances and therefore there really is no one-for-all solution. Luckily we offer a very bespoke solution for each of our clients. Contact us by email on firstname.lastname@example.org, we offer a free 30 minute consultancy to ANY person wanting to know a little more on the topic. Remember we only charge £67+vat for a fully inclusive accounting service to contractors.
Disclaimer: This article on Class B Shares is written for contractors using a limited company and therefore the information may not be relevant to all limited companies and you should consult with your accountant before acting on the following information.