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Employee Ownership – What Are The Options?

In recent years, employee ownership has become increasing popular, now delivering 4% of UK GDP annually. Employee owned businesses tend to achieve higher productivity levels as they have a more engaged and fulfilled workforce. We’ve noted below the main differences and benefits in some of the routes that a business owner should be considering, allowing them to transfer an interest in the company to their employees.

A common complaint of business owners is that they struggle to attract and retain talented employees. A simple way in which businesses can overcome these hurdles is to offer employees Employee Management Incentive (EMI) share options. Under an EMI scheme, employees are given the option to buy shares in their employer company at some date in the future, but at a price set today.

Benefits of offering EMI shares to employees are:

  • An effective means of attracting talented employees as well as rewarding them
  • Useful incentive to encourage employees to maintain high levels of performance
  • Low upfront costs for the employer and no cost to the employees
  • Options do not have to be rewarded to all employees; the employer can choose key people
  • Employer can set performance criteria which must be met before employee can exercise their option to purchase shares
  • Employer can offer options over a very small number of shares so as not to dilute their own holdings significantly
  • No tax implications for the employee until they sell their shares, provided certain conditions are met
  • Employee may qualify for 10% CGT rate on selling their EMI shares

Another option to consider is for the current shareholders, who view their employees as their successors, is to sell their shares to an Employee Ownership Trust (EOT) for the benefit of all employees.

Benefits of a qualifying EOT are:

  • 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
  • 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

Our Taxperts have assisted a number of businesses transition to Employee Ownership, and were recently featured in the Winter edition of the Fife Business Matters.

To find out more, or to discuss your circumstances, please contact our Employer Solutions team on [email protected].

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