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Employee Ownership Trusts are becoming an increasingly popular option for controlling shareholders as Tax Partner Sheldon Cole explains…

 

The sale of a company to an Employee Ownership Trust (EOT) is becoming increasingly popular as an exit strategy for controlling shareholders who are looking at their business succession planning. 

An Employee Ownership Trust is a discretionary trust set up by a company for the benefit of its employees. Retailers John Lewis and Richer Sounds and food producer Riverside Organic are all high-profile successful examples of where the company’s shares are controlled by an EOT.

This article discusses some of the key features and benefits where an individual transfers a controlling shareholding in their trading company into an EOT.

Why should you consider an Employee Owned Trust?

There are several reasons why a controlling shareholder might want to sell a majority shareholding to an Employee Ownership Trust.

They might prefer taking this route instead of a trade sale or sale to a private equity fund. It could be a better way of ensuring the succession of the business.

The structure of an EOT may also help retain and motivate employees, as they become beneficiaries of the Trust and so will indirectly own the company going forward.

What would a typical structure look like?

Generally, selling a company to an EOT involves the following steps:

  • The company creates an EOT. Typically, a new limited company would act as the Trustee of the Trust. The beneficiaries of the EOT would be the company’s employees.
  • The shareholder would sell a controlling shareholding in the company to the Trustee of the EOT for market value consideration. Typically, this would be an upfront cash payment and then deferred cash consideration – payments made at a later date.
  • The company contributes to the EOT, providing funds to pay the initial cash and deferred cash consideration to the individual selling their majority shareholding.
  • Once completed, the company’s shares are controlled by the EOT – the Trust holds and manages the investment for the employees as beneficiaries.

Tax features and benefits

The UK tax legislation contain several features which make selling a controlling shareholding to an EOT an attractive route in succession planning.

Capital Gains Tax (CGT) exemption – Where relevant conditions are met, a shareholder can sell their controlling shareholding in a company to an EOT without having to pay Capital Gains Tax. This could potentially save the shareholder 10% and 20% CGT at current rates.

Annual bonuses – A company controlled by an EOT can pay income tax exempt annual bonuses of £3,600 to employees (NB the bonuses are still subject to Class 1 NIC).

Tax liabilities - While cash paid by the company to the EOT used to fund the purchase of the majority shareholding from the controlling shareholder will not benefit from corporation tax relief, the Employee Ownership Trust should not be liable for tax on receiving the contributions.

Share incentives - Although the EOT will control the company, this will not prevent the company making use of tax advantaged employee share incentives to recruit new staff or retain key employees and directors, for example EMI share options. 

Income tax - To ensure the controlling shareholder isn’t liable to pay income tax on selling their majority shareholding, advance tax clearance can be obtained from HMRC under the “transactions in securities” income tax legislation.  And the EOT can obtain non-statutory clearance from HMRC that it will not be liable to pay income tax on cash contributions received from the company.

Where to get more advice

Anyone looking to explore the options of Employee Ownership Trusts as a potential exit route from a business or as part of business succession planning is urged to take corporate finance, share valuation, tax, and legal advice.

Thomas Westcott has a wealth of expertise and practical experience in advising controlling shareholders of trading companies. We can advise controlling shareholders of trading companies on how to set up Employee Ownership Trust structures.

For more help or advice, please contact Tax Partner Sheldon Cole in our Weston-super-Mare office on 01934 620428 or by email.