The benefits of Employee Ownership Trusts

The Finance Act 2014 introduced the concept of the Employee ownership Trust (EoT) but these have only gained traction in the last couple of years – May this year saw, for example, Julian Richer transfer a stake in his audio business, Richer Sounds.

Briefly, owners of a business may sell all or a qualifying interest in their business to a trust, the beneficiaries of whom are the employees.  The transfer of the business must be at fair value, and provided the conditions are met, sellers can dispose of their shares without triggering a capital gains tax liability.

There are a number of key advantages in respect of employee ownership and selling your business to an EoT which may include:

• Zero charge to Capital Gains Tax on sale as long as the conditions are met;

• Each employee can receive a tax free “bonus” from the EoT every year in the sum of £3600.00;

• The delays and costs often associated with trade sales or management buy outs are mitigated;

• Empowering management and employees alike is often seen as key to the future success and continuity of the business;

• Sellers need not be concerned about whether they qualify for Entrepreneurs Relief because a disposal to an EoT does not trigger a charge to Capital Gains Tax;

• Transfer of ownership to an EoT does not trigger a transfer under TUPE (Transfer of Undertakings (Protection of Employment Regulations) 2006 thereby dispensing with the need for consultation;

• Sale price is determined by an independent valuation. The risk of due diligence exercises being carried out and resulting in the sale price being renegotiated are greatly reduced.

As ever with any form of exit or employee benefit, the devil is in the detail.  Thought needs to be given as to who controls the EoT and who manages the EoT and therefore controls the Company on sale.

An EoT has up to seven years to purchase all of the shares in the trading business, but if the EoT cannot afford to purchase shares during the buyout period, the scheme will fail and the tax reliefs are likely to be withdrawn and tax will become chargeable on the disposal by the sellers.

Recognising the true value of employee ownership for a business is to value the democracy, greater distribution of wealth and collaboration that it brings.  It may be that additions are needed to the management team to ensure this is preserved before selling the Company to an EoT.

In conclusion, EoT’s are providing a different form of employee ownership and participation that hitherto has been linked to participation through benefit trusts or direct share ownership.

Whilst the tax reliefs are attractive, as is the ability to create a purchaser when you are ready to sell, without necessarily alerting your competition, or causing your employees worry over impending change, statistics are clear in that businesses owned by their employees benefit from increased profitability and lower staff turnover than their peers.

For further information on Employee Ownership Trusts, or for question or queries about your business generally, please don’t hesitate to contact us.