Most UK Limited Companies incorporate with one line in their share capital: ordinary shares of £0.01 each. That is often right. Sometimes it is decisively wrong. The founder who incorporates single-class then tries to bring in a working spouse eighteen months later, or who cannot use EMI options for a senior hire because the £250,000 grant limit is exhausted, is trying to solve with a bolt-on what should have been designed in.
Share classes are the vocabulary of corporate finance. Every right — voting, dividends, capital, information, consent — can be attached, restricted or removed by drafting them into the articles of a class. This guide covers the six classes we see most often in UK private companies, the commercial reasons to choose each, and how HMRC and the courts read the structures under scrutiny.
Why share classes exist at all
A share is a bundle of rights. UK company law lets you divide that bundle any way the articles permit. Every meaningful structural decision — bringing in an investor, incentivising an employee, splitting income across a family, retaining control while raising capital — is a question of which rights to give to whom, and on what terms.
The Model Articles ship with a single class of ordinary shares because that is the correct default for a company where all shareholders are equal. The moment shareholders should not be equal — because they are contributing different capital, different work, different risk, or need different tax treatment — the Model Articles need supplementing or replacing. Get this wrong, and every reorganisation later triggers stamp duty, CGT or SEIS/EIS disqualification. Get it right, and the classes silently do their job for a decade.
The classes founders actually use
- Voting
- One vote per share
- Dividend
- Pari passu with other ordinaries
- Capital
- Pro rata residual claim
- Used for
- Single-class founder companies and most SEIS/EIS eligible structures
- Voting
- Usually identical voting to ordinary
- Dividend
- Declared independently per class
- Capital
- Usually pari passu on winding up
- Used for
- Multiple shareholders needing different dividend flows — spouses, family, non-executive holders
- Voting
- Typically non-voting unless dividends in arrears
- Dividend
- Fixed rate or fixed % of profits, paid before ordinaries
- Capital
- Ranks ahead of ordinaries on winding up
- Used for
- Institutional investors, family-office loans structured as equity, some SME growth capital
- Voting
- Usually non-voting
- Dividend
- Participate only above a hurdle
- Capital
- Value above the hurdle only
- Used for
- Employee incentivisation post-CSOP/EMI limits, executive equity, sweat equity
- Voting
- No vote
- Dividend
- Same as voting ordinary of the same class
- Capital
- Pari passu
- Used for
- Retaining founder control while giving economic participation to family or minority holders
- Voting
- None
- Dividend
- None (or paid only after very high thresholds)
- Capital
- Only after huge distributions
- Used for
- Buy-back mechanics, capital reduction placeholders, historic structures being cleaned up
Alphabet shares: when they work and when they don't
Alphabet shares — typically A ordinary, B ordinary, C ordinary — are the workhorse of UK owner-managed tax planning. Each class usually carries full voting rights, full capital rights, and a right to dividends declared independently. That last point is the whole point: directors can declare a dividend of £30,000 on A shares and nil on B shares in the same year.
HMRC has fought this structure and lost. Jones v Garnett (the Arctic Systems case) confirmed in 2007 that a genuine outright gift of ordinary alphabet shares to a spouse — carrying full rights — is protected by the spousal exemption from the settlements legislation. What HMRC still successfully attacks is structures where the "gift" is really just a right to dividends: non-voting, no capital rights, no ability to sell. Those are caught by ITTOIA 2005 section 624 and the income is re-attributed to the working spouse.
Two ordinary alphabet classes (A and B) each with full voting rights, full capital rights and independently declared dividends. Following Jones v Garnett, HMRC accepts this if both spouses hold meaningful economic rights — not restricted to dividend-only shares.
A/B/C ordinary alphabet shares issued to each working director in proportion to their contribution. Enables the board to declare varying dividends by class to reflect year-on-year contribution — provided each class has meaningful rights and directors are genuinely working.
Alphabet classes issued to different family members. Directors declare dividends by class as part of a family tax-planning strategy. Watch settlements legislation carefully where minor children hold shares — HMRC applies parental settlements rules to income of £100+.
Preference shares in UK private companies
Preference shares rank ahead of ordinary shares — either on dividends, on capital, or both. In UK owner-managed businesses they surface mostly in three contexts: institutional investment (Series A onwards), family capital being introduced with downside protection, and buy-out finance where a departing founder takes preference shares in exchange for their ordinaries.
Two clauses do most of the work. The liquidation preference — usually 1x non-participating in current UK venture — determines what preferred shareholders get before ordinaries on a sale. The dividend rate — often a cumulative 5–8% coupon — determines whether unpaid dividends stack up over time. Model these together against a realistic exit range: a well-drafted 1x non-participating preference costs founders nothing on a large exit but protects investors on a modest one.
Preference shares disqualify a company from SEIS and EIS investment relief. If SEIS/EIS is on the horizon, keep the capital structure to ordinary shares only and defer preferences until after all SEIS/EIS money has been raised.
Growth shares — the modern equity incentive
Growth shares (also called "hurdle shares" or "flowering shares") are ordinary shares with a defined economic hurdle. They participate in the equity value of the company only above that hurdle — typically set at or slightly above the current market value. Because they have no rights to existing value, their value at issue is genuinely low. HMRC accepts this: the expected value of participating only in unknown future growth, suitably discounted, is a fraction of ordinary share value.
The tax result is powerful. An employee subscribing for growth shares at £0.01–£0.10 pays no income tax on issue (there is no gap between what they pay and market value). On exit, the gain between hurdle and sale price is treated as capital, taxed under CGT rules — typically 20% for higher-rate employees, or 10% up to £1m if Business Asset Disposal Relief applies. Compare that to unapproved options where the gain between exercise price and market value at exercise is income tax and NIC — potentially 47% on higher earners.
- Company valuation today
- £2,500,000
- Ordinary shares in issue
- 1,000,000
- Growth share hurdle (per share)
- £2.50
- Growth shares to executive
- 50,000
- Executive subscription price
- £500 (£0.01 nominal)
- Exit 5 years later at £8m
- £5.50/share × 50,000 = £275,000 to executive
- Approx. tax treatment
- CGT on £274,500 gain, not income tax
Illustrative only. Actual outcomes depend on independent hurdle valuation, holding period, availability of Business Asset Disposal Relief, and prevailing CGT rates. Not tax advice.
Where non-voting and deferred shares fit
Non-voting ordinary shares carry full economic rights but no voting power. They are useful when a founder wants to bring family into the economic upside without diluting board control, when passive investors are prepared to trade voting rights for a discounted entry price, or when trust and estate planning requires separation of voting from beneficial ownership.
Deferred shares — with no voting rights and only nominal economic rights that trigger only after enormous distributions — are the tidying-up tool of corporate housekeeping. When a buy-back has to be done at nominal value but the shares are worth more, converting them to deferreds before cancellation handles the mismatch cleanly. Rarely appropriate as a greenfield structure; almost always appropriate somewhere in a well-run reorganisation.
Five rules for structuring share classes
For 80% of pre-investment UK companies, a single class of ordinary shares is the right answer. It preserves SEIS/EIS eligibility (which requires only ordinary shares carrying no preferential rights), is understood by every UK bank and investor, and creates no diligence overhead. Complexity should be added only when a specific commercial need requires it.
Series A and later rounds almost always subscribe for preferred shares — 1x non-participating liquidation preference is the current UK market standard, with anti-dilution, information rights and consent matters. Existing ordinary shares become 'common' or 'ordinary' in the new structure. Draft carefully: over-generous preferences quietly eat founder returns on modest exits.
EMI options cap at £250,000 of grant value per employee. Above that, unapproved options attract income tax and NIC on exercise. Growth shares, priced correctly at issue with a defensible hurdle, deliver CGT treatment on future value. HMRC scrutinises hurdle valuations — commission a valuation report from a firm experienced in growth-share work.
The Arctic Systems case turned on the shares having full voting, capital and dividend rights. If a spouse holds shares that carry only rights to dividends, HMRC will apply the settlements legislation, treating the dividends as the working spouse's income for tax. The economic benefit of the split evaporates.
Once a class exists, its rights can be varied only under the class rights variation procedure in the articles or section 630 Companies Act 2006 — typically 75% consent of the affected class. This means adding a new class or changing terms materially requires class consents alongside the general shareholder resolution. Bespoke articles usually spell this out.
Bespoke articles and share class design
Fixed-fee articles drafting, share class implementation and HMRC valuation work.
View services →A 30-minute call to design the right share class structure for your company.
Book an advisor call →Share classes — advisor answers
Can I set up alphabet shares at incorporation?+
Yes — bespoke articles at incorporation can define alphabet ordinary classes from day one. This is often cleaner than a single class followed by a reorganisation, which typically triggers a stamp duty or CGT event. Where SEIS or EIS relief is planned, take specialist advice: some class structures disqualify.
Are growth shares HMRC approved?+
Growth shares are not a statutory scheme (unlike EMI or CSOP) so there is no HMRC approval. HMRC accepts the structure but examines two things: whether the hurdle reflects market value, and whether the class rights genuinely restrict participation to future growth. Non-statutory clearance under CTA 2010 s.1091 is available for certainty on capital treatment.
How do preference share liquidation preferences work?+
A 1x non-participating preference means preferred shareholders get their money back first (1x invested) on a sale, then ordinaries take the rest. Participating preference means preferred shareholders get their money back and then also participate pro-rata in the remainder. Participating preferences are unusual in UK venture and heavily negotiated.
Can I convert one class of share into another?+
Yes — usually by contractual reclassification via shareholder resolution and amended articles, provided the class rights variation procedure is followed. Converting between classes may crystallise CGT for the holder if HMRC treats it as a disposal; the reorganisation reliefs in TCGA 1992 s.135–137 usually apply but require careful documentation.
Do banks care what share classes I have?+
Yes. Banks read the Companies House share capital record before they onboard. Complex multi-class structures with no obvious commercial rationale, non-voting classes held by opaque holders, or 'nil-paid' shares in issue slow onboarding and can cause declines. Keep the story clean and documented.
Which share classes preserve SEIS/EIS relief?+
Only new ordinary shares carrying no preferential rights to dividends, capital or redemption qualify for SEIS or EIS. Preference shares disqualify. Growth shares with a hurdle qualify only if they carry no preferential rights — most well-drafted growth shares are structured to preserve SEIS/EIS eligibility for the founder ordinaries and are held by employees not seeking SEIS.
This article is general guidance based on UK company law and HMRC practice current at July 2026. It is not a substitute for tailored legal or tax advice. UK Company Experts is a trading name of Seven Oak Prestige Ltd.
Related guides from our editorial library.
Browse all insights
