Remember when the John Lewis business model of employee ownership was considered unusual and cutting edge?
Well now it’s not just big corporate businesses that are looking to change their ownership structures. More and more people are talking about employee ownership and more specifically Employee Ownership Trusts (EOT’s).
EOT’s are an HMRC approved structure that allows business owners to sell their business to a trust for the benefit of the entire employee base. This can be done at full market value and financed out of future profits of the business or raising 3rd party debt.
THE BENFITS
The reason some business owners consider selling their business to an EOT is because they want to access the tax benefits it can provide, being:
- 0% Capital Gains Tax for exiting shareholders
- Each employee can receive £3,600 as an income tax free bonus each year
For obvious reasons, the above make EOT’s an attractive proposition for business owners, compared to more traditional succession structures such as a management buy-out or 3rd party sale. 0% tax on disposal, simplified sales process (i.e. no external 3rd party) and the ability to leave the business to those that helped build it. It all sounds great.
However, despite what many in the market may advertise, EOT’s aren’t the magic one size fits all solution for everyone. They need to align to the objectives of all stakeholders – shareholders, managers and employees – to be truly the right answer.
A sale to an EOT may be the right option for business owners. Although the attractiveness of 0% tax should not sway business owners away from considering structures that may be a better commercial fit and all possibilities should be explored.
BUYER BEWARE!
There’s a lot more to EOTs, particularly around the governance that needs to be put in place.
EOT legislation is complex. Each case requires detailed planning and a tailored solution drawn up by qualified advisers. Adverse tax and legal consequences can arise if processes aren’t carefully followed – like the loss of the 0% relief! As such, professional advice should always be taken before implementing a sale to an EOT.
Talk to our experts to find out about EOTs or other options that might suit you and your business. Or if you want exclusive access to more insights why not join us at our show-stopping, knowledge-dropping, live and in-person FD events – in Birmingham or the East Midlands You’ll get to hear more about the other ways employers can minimise costs and maximise compliance.
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