Deferred shares are a class of share whose rights to dividends and capital rank behind every other class, usually so far behind that in practice they receive nothing, and which normally carry no vote. There is no statutory definition: the rights come entirely from the articles. Companies use them to neutralise existing shares without having to cancel them straight away, most often in a reorganisation or when a departing shareholder’s shares are converted under leaver provisions, after which the company can buy them back or cancel them.

What rights do deferred shares usually carry?

Whatever the articles say. Section 629 of the Companies Act 2006 treats shares as one class only if their rights are uniform, so deferred shares are always a separate class whose rights must be spelt out. Typical wording gives them:

  • no right to dividends;
  • a right to capital on a winding up only after the other shareholders have received a very large sum per share, so that in practice nothing reaches them;
  • no right to vote, and often no right to receive notice of or attend general meetings;
  • a power for the company to buy them all back for a nominal total sum, or to require their transfer to a person the directors nominate.

The model articles recognise the idea without defining it: article 30(5) stops an interim dividend being paid on shares carrying deferred or non preferred rights while any preferential dividend is in arrear. Whenever a statement of capital is filed, the deferred rights must be described as prescribed particulars of voting, dividend, capital and redemption rights under article 2 of the Companies (Shares and Share Capital) Order 2009, so the public record shows how limited they are.

Why convert shares into deferred shares rather than cancel them?

Cancelling issued shares takes more than a decision. A company can remove shares only through a purchase of its own shares, a redemption or a reduction of capital. A purchase under section 690 must be funded from distributable profits or the proceeds of a fresh issue (section 692), or by the capital procedures, and section 690(2) forbids a purchase that would leave only redeemable or treasury shares in issue. A reduction under section 641 needs a special resolution supported by a solvency statement, or confirmed by the court.

Converting shares into deferred shares, by contrast, is a change to their rights. It leaves the share capital untouched, needs no payment and takes effect at once, while stripping out almost all of the shares’ economic and voting value. The deferred shares can then be dealt with at leisure:

  • Small buyback. If its articles authorise it, a private company may buy its own shares out of capital without the full statutory procedure, up to the lower of £15,000 or the nominal value of 5% of its fully paid share capital in a financial year (section 692(1ZA)). The return of purchase is form SH03.
  • Acquisition for nothing. Section 659(1) allows a limited company to acquire its own fully paid shares otherwise than for valuable consideration.
  • Reduction of capital. The deferred shares can be cancelled as part of a later reduction of share capital.

How are deferred shares used when a shareholder leaves?

Founder and employee shareholdings often come with leaver provisions in the articles or a shareholders’ agreement. A common drafting technique is that a “bad leaver’s” shares, or the unvested part of anyone’s shares, convert automatically into deferred shares on the date of leaving. That solves two practical problems: the company does not need to find a buyer or the cash to buy the shares on day one, and the leaver cannot keep collecting dividends or block decisions while the position is sorted out.

The conversion works only if the articles contain the power before it is used. Where shares were acquired because of employment, the employment related securities rules in Part 7 of the Income Tax (Earnings and Pensions) Act 2003 apply to them (section 421B), so any conversion or forced sale should be checked against those rules as well as company law.

How are they used in reorganisations?

Deferred shares are a common tidying tool. Examples include converting part of a founder’s holding before new investors come in, so that value accrued to date is not shared with the newcomers, and splitting shares with an awkward nominal value into a small ordinary share plus a deferred share that is later bought back or cancelled. Subdivision itself needs a members’ resolution under section 618, and notice within one month under section 619 on form SH02.

For capital gains tax, section 126(2)(b) of the Taxation of Chargeable Gains Act 1992 treats the alteration of rights of a class, where there is more than one class, as a reorganisation, and section 127 then treats the new holding as the same asset as the old. But section 29(2) treats it as a disposal where a person with control exercises that control so that value passes out of shares owned by them or a connected person into other shares. Converting a family member’s or leaver’s shares into deferred shares moves value to the remaining shareholders, so the tax effect needs working through before the resolution is passed. See also growth shares, which are often used alongside deferred shares.

What approvals and filings are needed?

  1. Articles that create the deferred class and its rights, adopted by special resolution under section 21, with the amended articles at Companies House within 15 days (section 26).
  2. Class consent for any variation of existing class rights under section 630: the articles’ procedure, or written consent from three quarters in nominal value of the class, or a special resolution at a class meeting. Under section 633, holders of 15% of the class who did not consent can apply to court within 21 days.
  3. Notice of particulars of the variation within one month (section 637, form SH10) and of the new class name within one month (section 636, form SH08).
  4. Updating the register of members, which must distinguish each member’s shares by class (section 113(3)).
  5. New share certificates for the deferred shares. More detail is in redesignating shares.

Do deferred shares still count for tax and significant control tests?

Often, yes, which surprises people. HMRC’s Company Taxation Manual at CTM00514 says a share with no dividend rights is ordinary share capital, because the definition in section 1119 of the Corporation Tax Act 2010 excludes only shares with a right to a fixed rate dividend and no other right to profits. CG64050 says that for Business Asset Disposal Relief the percentage of ordinary share capital is measured by nominal value. Deferred shares with a large nominal value can therefore dilute the remaining shareholders below the 5% test in section 169S(3).

The same applies to people with significant control. Holding more than 25% of the shares means holding shares of a nominal value exceeding 25% of the issued share capital (paragraph 13 of Schedule 1A). A leaver whose shares have become deferred shares may still meet that condition until the shares are bought back or cancelled.

Pre emption works differently. Section 560 excludes from “ordinary shares” those that participate only up to a specified amount in both dividends and capital, so capped deferred shares usually carry no statutory pre emption right on new issues.

How might a leaver conversion work?

Illustration only. A company has 100 ordinary £1 shares: Ali holds 60 and Beth 40. Beth leaves as a bad leaver and the articles convert her 40 shares into deferred shares.

  • Ali now holds every ordinary share, and Beth has no votes and no realistic right to dividends or capital.
  • Beth still holds 40% of the nominal share capital, so she remains a registrable PSC and the deferred shares count in the ordinary share capital for relief purposes.
  • The articles let the company buy all the deferred shares for £1 in total. With articles authorising small buybacks, that falls within the section 692(1ZA) limit. The company files SH03 and cancels the shares, and Beth leaves the register.

What mistakes come up most often?

  • Relying on a conversion power that is in the shareholders’ agreement but not in the articles.
  • Skipping class consent or the SH10 and SH08 filings.
  • Leaving deferred shares in issue for years, so the former holder remains a member entitled to the accounts and possibly a PSC.
  • Ignoring the effect of deferred shares’ nominal value on other shareholders’ 5% relief test.
  • Treating the conversion as tax neutral without considering value passing to other shareholders.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.