Employee Ownership Trusts (EOTs) have become quite popular among business owners to sell their businesses. In the UK alone, there are now over 1,300 EOTs, and they received more than 400 applications last year. While the 0% tax break on Capital Gains is a significant advantage, there are other reasons why Employee Ownership Trusts (EOTs) are gaining traction.
How are EOTs structured?
The structure of an Employee Ownership Trust involves creating a new trust company that doesn’t rely on shares or shareholders. This kind of entity is already familiar because many charities use it. The EOT buys and owns the trading company on behalf of all qualifying employees, essentially making them co-owners. This eliminates the need to transfer shares when employees change, which reduces complications when it comes to succession. However, if necessary, some shares can still be held directly in the trading company.
To qualify for the 0% Capital Gains Tax (CGT), the Employee Ownership Trust (EOT) must purchase at least 51% of the trading company shares to achieve the required change of control.
What are the benefits of an Employee Ownership Trust?
- The value of the business can be comparable to a commercial sale.
- There is a 0% CGT on the value, provided certain conditions are met.
- Third-party financing can be accessed to increase the initial consideration.
- It serves as a great reward for the entire team and helps maintain the company culture.
- Unlike a management buy-out, the senior team doesn’t need to provide personal guarantees.
- EOTs have the potential to enhance staff productivity, retention, and recruitment.
- Employees can receive up to £3,600 per year as a tax-free bonus, subject to qualifying rules.
- The trading company acquired by the EOT can continue operating as a regular limited company, benefiting employees who have been with the company for over 12 months.
- Sellers can choose to remain involved as employees to facilitate a smooth handover and transition.
- The process is typically faster than a trade sale and involves less rigorous due diligence.
What are the risks of EOT?
Tax and succession considerations are also crucial. The Finance Act 2014 outlines the conditions for a tax-efficient transfer to an Employee Ownership Trust, promoting EOT businesses due to their positive impact on productivity, local investment, staff recruitment, and retention. While the generous CGT relief is appealing, it shouldn’t be the sole reason for choosing employee ownership.
The Employee Ownership Trust model allows shareholders to sell their businesses to an entity where they can still exert influence. It’s common for sellers to become Trustees of the EOT, which reduces the risk of deferred consideration. However, a downside is that some sellers may prefer not to wait for their money over a long period, making a trade sale at a higher multiple more attractive.
Sellers also worry about the consequences of ending the EOT if they decide to sell the company, as it may result in full-rate CGT and a significant portion of the proceeds allocated to employees, leading to a double tax charge that could discourage resale. Nonetheless, many sellers appreciate that EOTs are a long-term plan and shouldn’t be seen as a stepping stone to future exits or trade sales, as they protect their legacy.
Summary
Employee Ownership Trusts provide a viable option for exiting a business, but they may not be suitable for everyone. It’s essential to thoroughly explore the potential of an EOT, considering its perceived complexities.
Contact Avondale Corporate
Avondale would welcome the opportunity to discuss your exit options with you and help you plan for your future. Please call us at +44 (0)1737 240888, our Contact Us page or email av@avondale.co.uk to make an appointment. You can also visit our website at www.avondale.co.uk to learn more about our services.
