Alphabet Shares Tax Planning: The Essential Guide for Tax Advisers

Alphabet Shares Tax Planning for Owner-Managed Companies

By Nick Wright BSc, CTA, FCA

Alphabet shares are different classes of shares, commonly A, B, C and so on, used by owner-managed and family companies to give different shareholders different rights and greater flexibility over dividends. They can be a valuable tax-planning tool, but poorly structured arrangements can create problems under the settlements legislation, employment-related securities rules and company law, as well as attracting HMRC scrutiny.

Written by Chartered Accountant and Chartered Tax Adviser Nick Wright, this practical guide explains how advisers can structure, document and defend alphabet share arrangements, use them for dividend planning, identify high-risk cases and understand when apparently straightforward planning can create unexpected tax liabilities.

What Are Alphabet Shares?

Alphabet shares are separate classes of shares in the same company, usually labelled A shares, B shares, C shares and so on. Different classes can carry different rights, including rights to dividends, voting and capital. In owner-managed companies they are commonly used to provide flexibility over dividend payments, but the tax outcome depends on how the shares are created, what rights they carry, who receives them and how payments are made.

Dividend flexibility is the most common use, but not the only one. Separate share classes are also used for growth shares issued to employees, preference shares for investors, family investment companies and succession planning, where economic value passes to the next generation while the founders keep control.

Alphabet Shares, Dividends and HMRC Risk

With a single class of shares, every shareholder receives dividends in proportion to their holding. Separate classes allow the board to declare a different dividend on each class, so profits can be directed to the shareholders whose position justifies it. This is also why many advisers now use alphabet shares instead of dividend waivers: a waiver must be executed as a deed, and preparing one is a reserved legal activity that most accountants and tax advisers are not authorised to carry out.

The same flexibility is precisely what attracts HMRC scrutiny, and the risks have never been higher. From the 2025/26 tax year, directors of close companies must report their dividend income and their highest shareholding percentage on their self-assessment returns, giving HMRC unprecedented visibility of dividends that look out of line with a holding. The Supreme Court's Vermilion decision has redrawn the boundaries of the employment-related securities regime, and the High Court's ruling in Gu v Whibberley has cast new doubt on whether alphabet share structures are even validly constituted in many cases.

Get it right, and alphabet shares remain a legitimate, defensible and powerful planning tool. Get it wrong, and clients face PAYE assessments, NIC liabilities, settlements legislation challenges and professional negligence claims.

What This Report Covers

In 14 chapters, with three worked planning scenarios and appendices on the key legislation and cases, this 22,000+ word guide will show you how to:

• Navigate the three overlapping statutory regimes that govern alphabet shares
• Apply the Vermilion "bright line" rule to real client situations
• Meet the new 2025/26 close company dividend reporting obligations
• Avoid the settlements legislation traps in spouse and family arrangements
• Structure growth shares to minimise ERS charges on acquisition
• Transition clients from dividend waivers to compliant alphabet share structures
• Document arrangements to withstand HMRC challenge
• Assess when the spousal exemption will and will not apply
• Apply detailed planning scenarios to your own client base
• Understand the April 2026 BPR cap and its implications
• Identify high-risk arrangements before HMRC does
• Plus much more...

Settlements legislation and spouse/family arrangements

How bounty arises, what Arctic Systems, Patmore, Buck and Donovan mean in practice, and why the spousal exemption only protects shares that carry genuine voting and capital rights. The guide also explains why shares held by minor children do not work for income splitting, and why HMRC's Spotlight 62 targets structures that use grandparents to route dividends to grandchildren.

Employment-related securities and remuneration risk

The Vermilion "bright line" rule, when the personal relationship exemption protects family members and when it does not, how alphabet shares are valued on acquisition, and the annual ERS return due by 6 July. It also covers when dividends can be treated as earnings under PA Holdings, and HMRC's preferred Chapter 3B approach to dividend-driven arrangements.

Dividend waivers and alternative structures

What a valid dividend waiver requires, the lessons of the Upper Tribunal's decision in Gould, the inheritance tax risk of long-running waivers, and a step-by-step approach to moving clients from dividend waivers to a properly structured alphabet share arrangement.

Company law, share rights and documentation

What the articles of association must provide, whether shares that rank "pari passu save as to dividends" are genuinely separate classes after Gu v Whibberley, and the procedural steps under the Companies Act 2006. You will also find the records that make an arrangement defensible: a commercial rationale memorandum, board minutes for every dividend and an annual review.

Growth shares, BPR and other planning issues

Growth shares and EMI options for employees, including the April 2026 expansion of EMI, the CGT reorganisation and value shifting rules, stamp duty, family investment companies, and the £2.5m cap on 100% business property relief from 6 April 2026. The guide closes with adviser responsibilities, the reserved activity issue and DOTAS.

Who Will Benefit From This Report?

This guide is essential reading for any accountant, tax adviser or solicitor advising owner-managed companies, family businesses or family investment companies. It is equally valuable for in-house tax professionals and company directors who need to understand the rules governing share class arrangements in their own businesses.

If you create, review or rely on alphabet share structures for clients, this guide belongs on your shelf.

About Nick Wright FCA CTA

Nick Wright BSc, CTA, FCA is a Chartered Accountant and Chartered Tax Adviser, and Director and Head of Corporate Tax at Jerroms Miller Specialist Tax, an award-winning firm of tax advisers that supports accountants, tax advisers, solicitors and their clients.

Nick specialises in complex corporate tax matters, including employment-related securities and employee share schemes, transactions tax and company reconstructions, succession planning (including Employee Ownership Trusts and management buyouts) and the EIS and SEIS venture capital reliefs.

He is a regular contributor to Taxation magazine, Tax Journal, Tax Adviser, Tax Insider and ICAEW Taxline, and is a contributing author of Tolley Tax Planning, the Finance Act Handbook and British Tax Review. He lectures regularly to fellow professionals through CPD providers and CIOT and ICAEW branches, and hosts "The Tax Hour", a podcast of expert tax advice.

Read an excerpt from this report: Alphabet Shares vs Dividend Waivers: Why the Structure Matters.