Chartered Accountants
Employee Ownership Trust – A Strategy for Business Succession
Considering succession solutions can be a stressful time for business owners who are looking to exit the business whilst ensuring the future of the company is in safe hands. Typical succession plans involve either passing the shares in the company down to the next family generation, or selling to a third party. However, these options are not always attractive for a number of reasons. Children may not be involved in the business at all, ruling out family succession as a viable option. There may be no third party willing to purchase the company, or it may be that shareholders are reluctant to sell their company to a competitor.
Business owners understand that their employees are their greatest asset and as such, it is becoming common practice for current shareholders to view their employees as their successors.
Employee ownership can be either direct or indirect. Direct ownership can be implemented through the use of share incentive schemes such as Enterprise Management Incentives (EMI) or Company Share Ownership Plans (CSOP), or by employees purchasing shares in their employer company. The problem with direct ownership is that exiting shareholders do not realise any value as employees often do not have the cash to purchase their shares at, or close to, their market value.
Indirect ownership can offer a solution to this problem. In the past, Employee Benefit Trusts (EBTs) were available to implement indirect employee ownership. However, it was recognised by the Government that EBTs were not attractive to shareholders when considering succession plans and, in response, they introduced a new structure called the Employee Ownership Trust (EOT).
An EOT is a Trust which is set up to purchase shares from the current shareholders, which are held indirectly for the benefit of the employees. Provided the EOT is structured in a particular way and meets a number of qualifying conditions, there are very generous tax reliefs available for shareholders who sell their shares to an EOT.
Key benefits of a qualifying EOT include:
- Sellers can dispose of their shares and receive cash proceeds at full market value
- Does not require all shareholders to dispose of their shares
- The sale should be exempt from Capital Gains Tax (CGT)
- Incentivises employees who can now share in profits of the business
- Business continues with those best placed to run it
- Qualifying employees can receive an income tax free bonus of up to £3,600 per year
As can be seen above, selling to an EOT can be hugely beneficial for shareholders as well as companies and their employees. If you are considering selling shares to an EOT, our specialist team can help guide you through the process, ensuring the various conditions are met in order to secure the valuable CGT relief. If the sale is not correctly structured, there can be unexpected tax consequences.
EQ have assisted a number of businesses transition to Employee Ownership and are among the leading providers of Employer Solutions in Scotland.
In our next article, we discuss in more detail how the implementation of an EOT might be structured and consider the qualifying conditions for obtaining CGT relief.
For more information, or to discuss your circumstances, please contact our Employer Solutions team.
