Alphabet shares explained – a practical guide for UK business owners

For many owner-managed businesses, a single class of ordinary shares is simply too restrictive. Where there are multiple shareholders — particularly in family companies, growing businesses, or joint ventures — different people often need different rights.

Alphabet shares are a common and effective solution. When structured properly, they allow a company to vary dividend entitlements, voting power, and capital rights between shareholders without unnecessary complexity.

This guide explains what alphabet shares are, why UK companies use them, the key HMRC risks to be aware of, and how they should be implemented correctly.

At Rothstone Accountants, we regularly advise clients on alphabet share structures, particularly where tax efficiency and control are key considerations.

---

Key points at a glance

• Alphabet shares are ordinary shares split into different classes, such as A, B and C shares

• Each class can carry different dividend, voting, and capital rights

• They are commonly used in family companies, employee share arrangements, and joint ventures

• HMRC’s settlements legislation can apply where shares are issued to family members

---

What are alphabet shares?

Alphabet shares are not a separate legal type of share. They are ordinary shares divided into separate classes, each with its own rights set out in the company’s articles of association.

Most companies issue only one class of ordinary shares. In that scenario, rights are straightforward:

• One vote per share

• Equal dividend entitlement per share

• Equal entitlement to capital on a sale or winding up

For example, someone owning 25% of the shares is entitled to 25% of dividends, votes, and capital.

Alphabet shares change this by allowing the company to attach different rights to different classes of ordinary shares.

Example structure

A typical alphabet share structure might look like this:

• A ordinary shares – full voting rights, full dividend rights, full capital rights

• B ordinary shares – no voting rights, full dividend rights, no capital rights

• C ordinary shares – full voting rights, no dividend rights, full capital rights

The exact rights can be tailored. Dividends can be variable between classes, voting rights can be restricted or enhanced, and capital rights can be limited or excluded.

All of these rights must be clearly documented as the prescribed particulars in the articles of association.

---

Why do UK companies use alphabet shares?

In practice, alphabet shares are about flexibility. They allow companies to reflect commercial reality rather than forcing all shareholders into the same mould.

1. Family companies and succession planning

Family businesses often want to:

• Involve spouses or adult children financially

• Reflect different levels of involvement in the business

• Create income streams without giving up control

Alphabet shares allow dividends to be paid to family members while keeping voting control with the founders or directors.

This is an area where careful planning is essential, particularly from a tax perspective.

2. Dividend planning and tax efficiency

Alphabet shares can allow dividends to be paid selectively to certain shareholders, rather than strictly in proportion to shareholdings.

This can be useful where:

• Some shareholders are basic-rate taxpayers

• Others are higher or additional-rate taxpayers

However, this is also where HMRC scrutiny is most likely, especially in family situations (see settlements legislation below).

3. Employee incentivisation

Some companies use alphabet shares to reward key employees with:

• Dividend rights

• No voting rights

• No capital rights

This can align employees with company performance without diluting control or future sale proceeds.

4. Retaining founder or investor control

Founders may want to raise funds or share profits while:

• Retaining majority voting power

• Controlling strategic decisions

Alphabet shares allow this to be achieved transparently.

5. Joint ventures

When two or more parties create a joint venture company, alphabet shares can clearly define:

• Control

• Profit entitlement

• Exit and capital rights

This can prevent disputes later on.

---

A common and costly mistake

One of the most frequent issues we see at Rothstone is companies issuing alphabet shares without properly updating their articles of association.

If the articles do not specify different rights:

• All shares are deemed to rank equally

• Dividends paid selectively may be illegal

• Directors may be personally liable

This can also cause problems during:

• HMRC enquiries

• Investor due diligence

• A future sale of the company

Alphabet shares only work if the paperwork is right.

---

HMRC settlements legislation – a key risk area

HMRC’s anti-avoidance settlements legislation is particularly relevant where alphabet shares are issued to family members.

In broad terms, HMRC may challenge arrangements where:

• A shareholder gives shares to another person

• Dividends are paid to someone on a lower tax rate

• The original shareholder retains control or influence

If HMRC considers the rules apply, the dividend income can be taxed on the original shareholder rather than the recipient.

This most commonly arises with:

• Spouses or civil partners

• Minor children

• Alphabet shares created primarily to divert income

Each case depends on the facts, the share rights, and how the arrangement is implemented. At the time of writing, HMRC guidance indicates that properly structured outright gifts of ordinary shares can still be effective, but poorly thought-out alphabet share arrangements are frequently challenged.

This is not an area to approach without advice.

---

How to create alphabet shares correctly

Alphabet shares can be introduced either when the company is formed or after incorporation.

Creating alphabet shares on incorporation

The standard model articles are rarely suitable where multiple share classes are needed.

To issue alphabet shares at formation:

• The articles must be amended or replaced with bespoke articles

• Each share class and its rights must be clearly defined

• The prescribed particulars must be included on the incorporation application

• The initial shareholders must be allocated to the correct share classes

This is usually the cleanest and simplest approach.

Creating alphabet shares after incorporation

For an existing company, the process is more involved and typically includes:

• A special resolution (75% approval) to amend the articles

• An ordinary resolution authorising directors to issue shares under the Companies Act 2006

• Filing the resolutions and amended articles with Companies House

• Board approval of the share allotment

• Filing form SH01 within one month

• Updating statutory registers and the confirmation statement

Pre-emption rights must also be considered and, where necessary, disapplied correctly.

---

Do you need a shareholders’ agreement?

While not legally required, a shareholders’ agreement is strongly recommended where:

• There is more than one shareholder

• Multiple share classes exist

It can deal with dividend policy, share transfers, exits, and deadlock situations, and should always align with the articles of association.

---

What business owners should do now

• Review your current share structure and articles

• Check that past dividends align with share rights

• Be cautious where shares are issued to family members

• Take advice before using alphabet shares for tax planning

At Rothstone Accountants, we advise clients on the commercial, tax, and compliance implications of alphabet shares, including HMRC risk areas and long-term planning.

---

Final thoughts

Alphabet shares can be an excellent tool for UK companies, but only when they are implemented properly. Poor drafting, informal arrangements, or assumptions about tax treatment can create serious problems later on.

If you are considering introducing alphabet shares — or are unsure whether your existing structure is compliant — seeking tailored advice early can prevent costly issues with HMRC and avoid disputes between shareholders.