What is an Employee Ownership Trust?
An Employee Ownership Trust (EOT) allows business owners to sell their company to a trust which is held for the benefit of the company’s employees. By selling your business to an EOT, you can benefit from capital gains tax (CGT) relief, while also providing employees with a stake in the company, securing its long-term future.
An EOT is a special form of employee benefit trust which holds a controlling stake in a trading company on behalf of all its employees. EOT’s are sometimes seen as a way of extracting profits tax-free, but while that may be possible, care should be taken as there are pitfalls and significant conditions must be met.
Key Benefits of Selling to an EOT
Selling your company to an EOT provides substantial financial and operational benefits:
Capital Gains Tax Exemption
One of the most attractive benefits of selling to an EOT is the potential for exemption from capital gains tax (CGT) on the sale. This means you could sell your business without paying any CGT on the proceeds, providing a tax-efficient way to exit your company.
Attract and Retain Talent
With ownership shared amongst the employees, an EOT provides greater incentives for the workforce. This can lead to increased employee engagement, productivity, and loyalty, helping you retain key talent and attract new employees who are motivated by ownership.
Maintain Company Legacy
Selling to an EOT ensures that the future of the company remains in the hands of those who are most invested in its success—your employees. Unlike selling to a third party, where the company’s culture and values may be compromised, an EOT allows you to protect your legacy and ensure its continuity.
Long-Term Sustainability
An EOT aligns the interests of the employees with the success of the business. The shared ownership model encourages employees to focus on the company’s long-term growth and profitability, creating a more sustainable business model.
What are the tax advantages?
When a controlling interest in a company (or parent company of a trading group) is sold to an EOT, the seller could have no capital gains tax (CGT) on the disposal, as it is deemed to be made at no gain / no loss. This is better than the minimum 10% rate of CGT available for sale on the open market.
Certain bonuses of up to £3,600 each per tax year, which are paid to all employees, are exempt from income tax (but are not exempt from National Insurance Contributions). As this is not a dividend it can be paid when there are no profits/distributable reserves in the company.
There are no inheritance tax charges on the transfers into or out of the trust, and the trust assets should be outside the scope of the relevant property regime.
Why use an EOT?
- Employees indirectly own the company, increasing engagement and commitment, plus it allows employees to indirectly buy the company without having to use their own funds.
- This also creates an immediate purchaser for the company, allowing shareholders to sell their shares for full market value and addressing succession issues. The sale normally fixes the price at the date of sale agreement, meaning the vendor does not benefit from any growth during the payment period.
- Not all shareholders are required to sell their shares to the EOT (although in practice it is unlikely that shareholders would want to miss out on the CGT-exempt disposal opportunity).
- The vendors can remain as employees after the disposal, receiving remuneration for their work.
- As the sale to the EOT does not involve outside parties, the sale process may be quicker and cheaper than a third party sale, where numerous warranties and indemnities may be required.
What are the main qualifying conditions?
- The company whose shares are transferred must be a trading company/principal company of a trading group.
- The EOT must meet the ‘all-employee benefit requirement’/‘equality requirement’ – any benefit to employees must be on the same terms for all eligible employees (participators are not eligible employees). So the trust cannot prioritise benefits to the advantage of particular employees, but it can allocate benefits of differing amounts according to factors such as salary and length of service.
- The EOT must not hold a ‘controlling interest’ in the company (i.e. more than 50% of ordinary share capital) at the start of the tax year of the transfer but must hold a controlling interest at the end of the tax year in which the transfer takes place. This effectively limits the relief to a single tax year and means most disposals will be for the full ownership of the company, not just a controlling interest.
- The proportion of employees who are participators (or connected to participators) must not exceed 40% in the 12 months following the disposal. This appears to be intended to prevent owner-managed businesses with few/no employees from using an EOT to extract tax-free profit, to prevent the type of abuse that blighted previous employee benefit trusts.
How it works
Setting up an EOT involves a straightforward process:
Free Phone Consultation – We will assess your business and guide you through the suitability of an EOT based on your long-term goals.
Structuring the Sale – Our tax experts will structure the sale of your company to the EOT, ensuring you take full advantage of the available tax reliefs.
Ongoing Support – Once the sale is completed, we provide ongoing support to ensure the trust is managed effectively and continues to provide benefits to both the business and its employees.
Why choose Tax Innovations?
At Tax Innovations, we specialise in helping business owners navigate the complex tax and financial landscape of selling to an EOT. With our expert guidance, you can be confident that the sale of your business is structured in the most tax-efficient way while maintaining the integrity
and the future of your company.
Expert Guidance: Our team has extensive experience in setting up EOTs and guiding business owners through the sale process.
Tailored Solutions: We work closely with you to create a bespoke plan that aligns with your financial goals and ensures the long-term success of the business.
Complete Compliance: We ensure that all aspects of the EOT are compliant with HMRC regulations, giving you peace of mind throughout the process.
With the Government known to be looking at the low rates of CGT available in the UK, having already reduced the lifetime limit for Entrepreneur’s Relief, disposals to Employee Ownership Trusts have never looked better. Tax Innovations can help to guide you past the potential pitfalls
of selling your business to an EOT.
Download Your Free EOT Guide
Please call us on 01962 856 990 or visit our contact page.