A quick note: this article is general information, not personal advice. Tax and accounting rules change and everyone's situation is different, so please don't act on anything here without checking how it applies to you. We'd be happy to help — get in touch before making any decisions.
When most people form a limited company, they tick the default box: 100 ordinary shares of £1 each, and that's that. For plenty of businesses it stays that way forever, and quite rightly. But company law gives you enormous freedom to design your share capital, and the different classes of share you see in private companies — ordinary, preference, redeemable, convertible, alphabet, growth and freezer shares — each exist to solve a specific commercial or tax problem.
In this guide we walk through each type in plain English, with the sort of owner-managed business examples we see every week, and then pull the tax threads together: dividend flexibility, income splitting and the settlements legislation, Business Asset Disposal Relief, employee share incentives and inheritance tax planning. As ever, this is general information rather than advice — share restructuring sits squarely in "get professional help first" territory.
Key takeaways
- Most companies only ever need ordinary shares — but company law lets you design share classes around voting, dividend and capital rights.
- Alphabet shares allow different dividends per shareholder; preference and redeemable shares suit investors.
- Growth and freezer shares pass future value to others — the engine behind Family Investment Companies.
- Tax follows the rights attached: dividends, CGT, inheritance tax and the employment-related securities rules all react to share design.
- Paperwork matters: articles, resolutions, valuations and elections must be right and on time.
First, what rights can a share carry?
Every share is a bundle of rights, and there are really only three that matter:
- Voting rights — the right to vote at shareholder meetings and so control the company.
- Dividend rights — the right to a share of distributed profits.
- Capital rights — the right to a share of the proceeds if the company is sold or wound up.
Different share classes are simply different mixes of those three rights, written into the company's articles of association. With that framework in mind, the various share types stop looking exotic.
Ordinary shares
The workhorse. Ordinary shares normally carry full voting, dividend and capital rights in proportion to the number held. If you own 60 of the 100 ordinary shares, you control the company, take 60% of any dividend declared on them and receive 60% of the sale proceeds.
SME example: two friends set up a design agency 50/50 with one ordinary share each. Every decision, every dividend and every pound of eventual sale value is split equally. Simple — until their circumstances diverge, which is where the other share types come in.
Tax angle: ordinary shares are the baseline for most reliefs. Business Asset Disposal Relief, for instance, requires (among other things) that you hold at least 5% of the ordinary share capital and voting rights of your "personal company" for at least two years before a sale.
Preference shares
Preference shares rank ahead of ordinary shares for dividends, capital on a winding-up, or both — usually in exchange for giving up voting rights and any share in growth. A typical preference share pays a fixed dividend (say 6% of its nominal or subscription value) before the ordinary shareholders see anything.
SME example: a retiring founder sells the trading business to her management team but leaves £200,000 in the company as preference shares paying a fixed dividend. She gets a predictable income stream and priority if things go wrong; the managers keep all the voting control and future growth. Preference shares are also common where a family member or investor puts money in but shouldn't have a say in running the business.
Tax angle: preference dividends are taxed as dividend income like any other. The trap is Business Asset Disposal Relief: fixed-rate, non-voting preference shares generally don't count towards the 5% "ordinary share capital" test — and in some cases can complicate whether other shareholders meet it — so take advice before layering them into a company you may one day sell.
Redeemable shares
Redeemable shares are issued on terms that the company can (or must) buy them back at a set price, on a set date or at the directors' option. They are a built-in exit mechanism.
SME example: a company brings in a short-term investor to fund a new production line. Rather than negotiating a messy buy-out later, the investor takes redeemable preference shares that the company redeems out of profits over five years. Everyone knows the exit terms from day one. Redeemable shares are also handy for employee shareholders — if someone leaves, the company can redeem their shares rather than relying on a willing buyer.
Tax angle: when a company redeems or buys back shares, the default treatment for an individual is an income distribution — the excess over the amount originally subscribed is taxed like a dividend, at up to 39.35%. Capital treatment (CGT at 18% or 24%, or 14% with Business Asset Disposal Relief in 2025/26) is available for a trading company buy-back only if strict conditions are met, including five years' ownership and a substantial reduction in the shareholder's stake, with the transaction benefiting the trade. HMRC will confirm the treatment in advance under a statutory clearance — always worth getting.
Convertible shares
Convertible shares (or convertible loan notes, their debt cousin) start life as one thing and convert into another — typically preference shares or loan capital converting into ordinary shares when a trigger event happens, such as a funding round, a sale or hitting profit targets.
SME example: an angel investor backs an early-stage software company but can't yet agree a valuation with the founders. She invests via convertible shares that flip into ordinary shares at a discount to the price set by the next funding round. The valuation argument is deferred until there's real evidence to price against.
Tax angle: conversion rights need careful drafting because they can affect whether shares count as "ordinary share capital" for relief purposes, and for employees they fall within the employment-related securities rules — converting a low-value share into a valuable one can crystallise an income tax charge if the structure isn't right.
Alphabet shares
Alphabet shares are simply multiple classes of ordinary share — A shares, B shares, C shares and so on — usually identical except that dividends can be declared separately on each class. They are the most common share structure we put in place for family and owner-managed companies.
SME example: a husband-and-wife company gives him A shares and her B shares. In a year when she has no other income, the company declares a larger dividend on the B shares, using her personal allowance and basic-rate band. In a year when she takes a full-time job elsewhere, the dividend mix shifts the other way. With dividend tax rates rising to 10.75% (basic), 35.75% (higher) and 39.35% (additional) from April 2026, and the dividend allowance at just £500, that flexibility is worth real money each year.
Tax angle: this is where the settlements legislation comes in. HMRC can tax income you've "settled" on someone else as if it were still yours — but there's a key exemption for an outright gift between spouses or civil partners, provided the gift is of genuine ordinary shares carrying full rights (not just a right to income) and comes with no strings attached. That principle was confirmed in the well-known Arctic Systems case. Alphabet shares between spouses, done properly, remain effective; shares with dividend-only rights given to a spouse, or arrangements involving minor children, are where it goes wrong. Dividend waivers used aggressively attract the same scrutiny. Structure matters — get it checked.
Growth shares
Growth shares are a special class that only participates in value above a hurdle — typically set 10–20% above the company's current value. If the company is worth £2 million today and is later sold for £5 million, growth shares issued with a £2.2 million hurdle share only in the £2.8 million of growth above it.
SME example: a recruitment firm wants to lock in a key director but the founders don't want to give away any of the value they've already built. The director subscribes for growth shares over 10% of future growth above the hurdle. If she grows the business, she shares in what she created; if she leaves early, leaver provisions claw the shares back.
Tax angle: because the hurdle strips out today's value, growth shares have a low initial value, so the employee can acquire them cheaply without a big income tax charge — but they are still employment-related securities. That means a robust valuation at issue is essential (HMRC will not agree growth-share valuations in advance), an ERS section 431 election is normally signed within 14 days so future growth is taxed as capital gain rather than employment income, and the issue must be reported on the company's annual ERS return. Compare the alternative: an EMI option scheme, where qualifying companies can agree the valuation with HMRC up front, the employee pays nothing until exercise, and Business Asset Disposal Relief can apply after two years even below the 5% threshold. EMI is usually the first choice where the company qualifies; growth shares come into their own where it doesn't — for example, companies with more than 250 employees or £30 million of gross assets, non-employees, or excluded trades.
Freezer shares
Freezer shares (or "frozen" shares) are the estate-planning mirror image of growth shares. The founder's existing shares are converted into a class whose value is frozen at today's worth — often with a preferential right to that fixed amount — while new growth shares carrying all the future upside are issued to the next generation or a family trust.
SME example: a father owns a property-rich trading company worth £3 million. He converts his holding into freezer shares fixed at £3 million of value and keeps the votes, so he stays in control and keeps his capital. New growth shares go to his two adult children. If the company is worth £6 million on his death, the £3 million of growth sits in the children's estates, not his — it was never his to be taxed on.
Tax angle: freezing caps the inheritance tax exposure on future growth rather than relying solely on Business Property Relief — which matters more than it used to, because from April 2026 the combined 100% business and agricultural property relief is capped at £1 million per person, with relief at 50% above that. Freezer arrangements need care on several fronts: the reorganisation itself must not trigger a capital gains disposal or a transfer of value, gifts of the growth shares to children are potentially exempt transfers (or chargeable transfers into trust), and if any recipients work in the business the employment-related securities rules can bite. This is sophisticated planning — bespoke advice and a proper valuation are non-negotiable.
Pulling the tax threads together
Across all of these structures, the same handful of UK tax rules keep recurring:
- Dividend tax: the dividend allowance is £500, and from 6 April 2026 dividend rates rise by two percentage points to 10.75% (basic rate) and 35.75% (higher rate), with the additional rate unchanged at 39.35%. Spreading dividends across family members with unused allowances and bands — legitimately, via real share ownership — is more valuable than ever.
- Settlements legislation: income splitting works when it's an outright gift of full ordinary shares between spouses or civil partners; it fails when shares carry only income rights, come with strings, or involve minor children.
- Business Asset Disposal Relief: the rate is 14% for disposals in 2025/26 and rises to 18% from 6 April 2026, on a lifetime limit of £1 million of gains. Eligibility needs 5% of ordinary share capital and votes in your personal company (plus an entitlement to 5% of profits and assets or sale proceeds), held for two years, while you're an officer or employee — so watch how new share classes dilute or disturb those tests.
- CGT vs income tax: the whole game in employee share planning is ensuring growth is taxed as capital gain (18%/24%, or better with reliefs) rather than employment income (up to 45% plus National Insurance). Section 431 elections, market-value subscriptions and clearances are the tools.
- Employment-related securities: any share acquired by reason of employment — including by directors and often their family — is within the ERS regime, with valuation, reporting and PAYE consequences if it's mispriced.
The bottom line
Share classes are tools, not tricks. Used properly, they let a private company pay dividends flexibly, bring in investment on sensible terms, incentivise the people who will grow the business and pass value to the next generation efficiently. Used carelessly, they trip the settlements legislation, break Business Asset Disposal Relief, or land employees with unexpected income tax bills.
Every restructuring needs three things: commercial substance, correct paperwork (articles, resolutions, valuations and elections filed on time) and advice that looks at the whole picture — company law, income tax, CGT, IHT and the ERS rules together. If you're wondering whether your company's share structure is still working for you, book a free consultation and we'll talk it through. We design and implement share structures for companies across Medway and Kent from our Rochester office — see our accountants in Rochester page.
