If you are looking at the options available for exiting your business, an Employee Ownership Trust (EOT) may be worth considering. Previously, an individual looking to sell their shares in their company to a trust for the benefit of the employees faced a potentially significant tax charge. However, since the introduction of the EOT under the Finance Act 2014, this is no longer the case.
How does an Employee Ownership Trust work?
The introduction of Employee Ownership Trusts was intended to encourage more companies to become employee-controlled.
The first step is that a qualifying EOT is established. The sellers will then sell shares to the trustee of the EOT under a share purchase agreement. The sellers must sell, and the EOT must maintain, a controlling interest in the company (generally over 50% of the company’s shares) to the EOT. This means that sellers of the company have the option of retaining a stake in the company following the sale to the EOT.
It is common for the purchase of the shares by the EOT to be made by way of deferred consideration so that a portion of the money may be paid upfront, with the remainder creating a debt to the Trustee Company. This is repaid over a period of time using the profits of the company.
Advantages of an Employee Ownership Trust
One of the main advantages of an Employee Ownership Trust is the associated tax advantages, both for the company and for the staff. The sellers benefit because the sale of the shares to the EOT will not attract capital gains tax, while the employees benefit because the structure enables them to receive a tax-free cash bonus of up to £3,600 per employee each year. However, it should be noted that National Insurance contributions are nonetheless payable and stamp duty will still be payable by the EOT.
In addition to the tax advantages, it is widely considered that there are many benefits associated with this type of structure, such as increased staff motivation and commitment as well as enhanced business performance. An EOT can enhance employee engagement and it helps to protect the employees who have contributed to the success of the company from any post-sale changes implemented following a change of ownership. An EOT also means that the customers and suppliers of the company can continue to deal with the same people and it can therefore be beneficial to the continued success of the business.
It may be that EOTs become one of the most desirable methods of future success for businesses, placing a majority of the company’s shares in the hands of people who have the best understanding of how that business operates.
If you would like to receive further information or advice in relation to an Employee Ownership Trust please contact Jeremy Orrell, Head of the Corporate Team, on 0344 391 582 or email: [email protected].