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March 10, 2023
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Employee Ownership Trusts: What's all the hype?

What is an Employee Ownership Trust (EOT)?

EOTs were introduced by the Conservative – Liberal Democrat coalition government in 2014 to encourage employee ownership in companies throughout the UK.

An EOT is a vehicle which acquires a controlling interest (51% or more) within a company and holds those shares on behalf of the employees of that particular company and allows the employees to become beneficiaries of the trust property. It can often assist with an exit or succession planning strategy for the business owners.

Why would I choose to sell to an EOT?

  • Capital Gains Tax relief is available to the seller (see below);
  • Shareholders can sell their shares at full market value;
  • Shareholders do not have to sell all of their shares to the EOT so still allows them to have a say in company decisions;
  • EOTs create a friendlier, immediate purchaser (some trades are unique and this can naturally make it more difficult to find a seller);
  • Incentivise, attract the brightest talent, reward and retain employees;
  • Employees can receive a bonus up to £3,600 free of Income Tax per tax year;
  • It can provide long-term structure and security for the continuity of the business; and
  • Inheritance Tax liabilities can be mitigated if correctly structured and conditions are met.

The Capital Gains Tax relief

There is Capital Gains Tax relief that states that if a person other than a company disposes of any ordinary share capital in a company to the trustees of a settlement, the relief requirements are met and the correct claim is made, the disposal by the vendors & the acquisition by the trustees are treated for CGT purposes as a no gain/no loss.

In order to be eligible for the relief, the following five conditions need to be met:

  1. Trading requirement – This is met if the company is a single standalone ‘trading company’ and not part of a group or if it is the principal company of a ‘trading group’;

 

  1. The all-employee benefit requirement – the property of the trust must operate for the benefit of all employees. The property of the trust should only be for the benefit of ‘eligible employees’ on the ‘same terms’. This does not mean that distributions have to be made in equal tranches, a differentiation can be made based on the level of remuneration, the length of service and the hours worked.

 

  1. The controlling interest requirement – 51% or more of the company must be sold to the EOT and this level of ownership should be retained by the EOT throughout and on an ongoing basis;

 

  1. The limited participation requirement – The number of continuing shareholders and other 5% participators who are employees or directors must not exceed 40% of the total number of employees of the company/group;

 

  1. The related disposal requirement – No other claim can be made for the CGT relief in relation to any ‘related disposal’ made by a participator or by any person connected with the participator in a earlier tax year – relief can only be claimed by a participator and any connected person in one singular tax year.

How can the EOT fund the purchase?

There are two main ways in which this can be done:

  1. A third-party loan – The third party could take security in the form of a charge over the shares held by the trustees; and/or
  2. Through future distributable profits of the company.

If you have any queries on any of the information in this article, or need help with regards to EOTs, please do not hesitate to contact me at ahad@pd-tax.co.uk

Disclaimer: This article is for general information only and is not intended to constitute individual advice. It is recommended that you seek independent tax advice before taking steps to introduce an EOT into your business.

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