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Employee Ownership Trust – Selling a business with Zero tax

Employee Ownership Trusts or EOT for short, have been around since September 2014. It’s only now however, that everyone’s talking about them. 

The COVID pandemic, together with rumours and speculation of hikes to capital gains tax and reduction or even abolition of the Business Asset Disposal Relief to help pay off the billions of debt we’ve accrued since the start of the pandemic, have brought the scheme into the spotlight. So, we take a brief look at what it is and how practical it is in reality for owner managed businesses to get these tax advantages.

What is an Employee Ownership Trust (EOT)?

An employee ownership trust is a form of employee benefit trust which the Government introduced in an attempt to lure shareholders and business owners into creating more employee owned businesses. The most well known example of such a model is the John Lewis Partnership.

How has the government encouraged such a scheme? Quite simply, by offering tax breaks to shareholders who move to an employee-ownership structure. The scheme is not as straightforward as you might think however, since it has a number of rules and criteria and generally, it’s a long term commitment.  

How does an EOT work?

  1. An EOT is formed with a corporate trustee. This is known as a Trustee Company.
  2. The shareholders sell their shares (or at least 51% of them) to the EOT. You’ll need an independent share valuation from an expert who is jointly appointed by both the shareholders and the Trustee Company.
  3. Once a sale has taken place, a debt is created between the Trustee Company and the shareholders for the sale price amount.
  4. The company pays off this debt through its profits and in turn, the repayments are paid to the shareholders.

What are the benefits of selling your business through an EOT?

  • Staff can buy the company from the shareholders without them having to use a penny of their own money.
  • There is a buyer straight away for your business.
  • You can sell your shares at full value.
  • There is no capital gains, income or inheritance tax to pay in most cases.
  • You can stay on in the business if you like, subject to certain rules.
  • Costs should be lower and the transaction quicker.

How do I qualify for an EOT sale?

There are some basic criteria that must be met to qualify and sell through the scheme.

  1. The company being sold must be a trading company. Principle companies of a trading group also qualify.
  2. Eligible employees must generally be offered a piece of the pie on the same terms. You can switch things up a little based on things like earnings and length of service but broadly, all employees will need to benefit.
  3. A sale must be for at least 51% of the shares in the business and in the same tax year. If you want to stay on as a director or employee, you can’t if the sellers or those closely connected (spouse/family members etc) make up more than 40% of the workforce.

So, the scheme isn’t for everyone but, if you meet the criteria, want to sell your business tax free, and are happy receiving your money over time; it’s the perfect option.

If you’re not a Limited company, it can be a little bit more tricky. You’d need to convert to a limited company first and subject to meeting certain conditions, you should be able to benefit from the scheme.

Interested?

Hilton Smythe specialise in helping owner managed businesses sell. We are the market leader in business sales throughout the UK.

If the scheme catches your eye, get in touch for more information and to see how we can help you with your EOT sale. Our aim is to advise in plain English and help make the sale a reality.

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