Share Structure Planning UK —
The Foundation of Every Tax-Efficient Business

Single class share structures mean all shareholders receive the same dividend per share — with no flexibility to allocate dividends according to individual tax positions. For husband and wife companies, this wastes the lower-earning spouse’s personal allowance and basic rate band. Alphabet shares cost very little to implement at formation but are more complex to add later.

EMI options must be granted at the market value agreed with HMRC’s Shares and Assets Valuation team. Without HMRC agreement, the option gain may be reclassified as employment income — subject to income tax at up to 45% rather than CGT at 10%. We obtain HMRC valuation agreement before every EMI grant.

EMI is only available to qualifying companies — trading companies (not mainly investment), with gross assets below £30 million, fewer than 250 full-time employees, not listed, and in non-excluded trades. Checking qualifying company conditions before designing an EMI scheme avoids implementing a scheme that turns out not to qualify.

Spousal share transfers are most tax-efficient when done early in the company’s life — before significant value has accrued. Transferring shares in a company worth £5 million means the spouse acquires shares with significant embedded value; all future growth above that value is theirs, but only future growth. Earlier transfer captures more future growth in the lower-rate hands.

Alphabet shares are multiple classes of ordinary shares (A shares, B shares, C shares, etc.) that are identical in all respects except for dividend entitlement. Because different dividend amounts can be paid to holders of different share classes in the same period, the company can allocate dividends flexibly — paying different amounts to different shareholders according to their individual tax positions. This is completely legal as long as the shares are genuinely different classes and the directors have discretion over dividend amounts.

Growth shares are a class of shares issued at the current market value of the company (typically a very low value for early-stage companies). Because they are issued at market value, they have a low (or nil) ACB for Capital Gains Tax purposes. As the company grows, the increase in value above the issue price accrues to the growth shares and is taxed as a capital gain (not employment income) when sold. This makes them attractive for employee incentivisation where EMI is not available.

EMI options allow an employee to purchase shares in the future at today’s price (agreed with HMRC). The increase in value from grant date to exercise/sale is taxed as a capital gain — at 10% with BADR — rather than as employment income at up to 45%. On a £200,000 gain, the tax saving is £70,000 (35% × £200,000) compared to the employee receiving equivalent cash as salary. The company may also benefit from a Corporation Tax deduction on the option gain.

The earlier the better. Restructuring share classes after the company has significant value creates CGT implications and HMRC scrutiny. Adding alphabet shares at formation costs very little. Adding them when the company is worth £1 million requires a share reorganisation with HMRC clearance. Adding them when the company is worth £5 million may trigger significant CGT on the reorganisation unless carefully structured. We recommend reviewing share structure at each significant milestone.

A shareholder agreement is a private contract between shareholders governing their relationship — dividend policy, transfer restrictions (pre-emption rights), drag-along and tag-along rights, good leaver and bad leaver provisions, voting rights on key decisions and dispute resolution. Unlike the Articles of Association (which are public), a shareholder agreement is private. It is strongly recommended for any company with two or more shareholders — particularly where one shareholder might exit, new investors might join or disputes might arise over dividend policy.