What is an Employee Ownership Trust?
Employee Ownership Trusts (EOTs) were introduced by the Finance Act 2014 and enable business owners to sell their shares to an employee-owned trust. As well as providing significant tax incentives, this form of ownership enables shareholders to exit their business where there is no obvious third party purchaser, whilst also rewarding employees and improving staff retention and overall morale.
What are the advantages of an EOT?
- When a business owner sells their shares to an EOT, they can receive full market value for those shares without paying capital gains tax. This is favourable to the general 20% capital gains tax (10% where Business Asset Disposal Relief applies) that would otherwise be payable.
- The EOT will not be subject to the trust’s regime and as such, the shares owned by the trust will not attract any IHT charges.
- The trust can gift employees bonuses of up to £3,600 per annum, income tax free, which incentivises the work force and contributes to a motivated and innovative environment.
- EOTs are more resilient to economic hardships due to the employees having more willingness to remain with the company and work harder to increase its success.
- They can provide a prompt exit route as there are no trade buyers involved.
- It is not a requirement that all shares must be sold to the EOT, but the trust must own more than 50% of the shares. The current owner or shareholders can therefore retain some shares in the company (but collectively no more than 49.9%) instilling peace of mind that the business will run smoothly in the hands of the trust.
What are the conditions of an EOT?
- The business selling its shares to an EOT must be a trading company or the holding company of trading business.
- The trust must have a “controlling Interest” with at least 51% of the assets, share capital and voting rights.
- The shareholders with more than a 5% interest in the company must not make up more than 40% of the entire workforce after the sale.
- All employees must benefit from the EOT equally under the “all employee benefit requirement” however, the trustees can take factors such as hours worked, length of service and remuneration into account when gifting bonuses to the employees.
What could this mean for you and your business?
Surplus cash in the business is normally used to fund the EOT as the trust may be unable to acquire significant finances from the bank. The seller is paid from the profits made by the business over time. This means that the original shareholder may have to wait for a number of years before they are economically reinstated from the trust. Once the seller has been paid in full, the company can then look at financially rewarding its employees.
If you are thinking about selling shares to an EOT, contact our specialist tax team today to talk through your options and receive tailored advice.
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