The Employee Ownership Trust (EOT) first saw the light of day in 2014. It is a structure which allows the employees of a company own most (or even all) of the shares in a company. The EOT model offers a range of benefits to the employees, the business itself and owners who are planning succession.
An EOT provides a tax-free exit for corporate business owners and can reward employees with a tax-free bonus of up to £3,600 per tax year. It allows a business to retain its independence, create a positive culture and attract talent.
In early 2020, just before the pandemic took hold, the Business Asset Disposal Relief rules changed significantly. The lifetime limit was slashed from £10 million per person to only £1 million. These changes to Business Asset Disposal Relief (formerly known fondly as Entrepreneurs Relief) and an increasingly likely increase in capital gains tax rates in the March 2021 budget mean that the cost of exiting for business owners is set to increase.
If the anticipated increases in capital gains tax rates come to pass, owners selling their business could see the rate of tax they pay increase from 10% to a maximum of 45%. By contrast a disposal to an EOT offers a tax-free exit so the increased level of interest is understandable.
It comes as no surprise that, where there are such generous tax breaks, there is a raft of qualifying conditions to be met. The key EOT requirements include ensuring that the current business owner sells a controlling interest in the company to the EOT Trustees. All employees must also be able to benefit from the EOT on the same terms. There are a number of other conditions which, if they are all met, mean that the sale of the shares gives rise to no tax liability for the vendor whatsoever. As you would expect, the shares must be independently valued, and that value needs to be agreed by the EOT Trustees.
Business owners who are considering using an EOT will need to give much thought as to how the EOT is going to fund the purchase of the shares. The usual options available are a transfer of funds from the company to the EOT, loan notes, external funding, or a combination of these.
Serious consideration should also be given to the question of who the Trustees should be. There is no reason why a vendor cannot remain on the board of the company and/or hold the position of Trustee as well. Obviously, there will need to be careful consideration in addressing the conflict of interest issue. In many cases, the Trustee is a company limited by guarantee and the directors of that company will include employees, the vendor, and an independent person. The use of the company limited by guarantee affords protection from personal liability for those individuals.
EOTs have been with us since 2014 and there has been limited interest in them up to now. The level of interest is certainly increasing, and it seems that the EOT is about to enjoy its day in the sun.
Friend Partnership offer a comprehensive service for business owners who chose to go down the EOT route. If this is something that you feel may be appropriate to you, we will be happy to have a no obligation discussion with you to explore the subject and to look at whether it will suit you and your business. Contact David Gillies on 44(0) 121 633 2007 or via david.gillies@friendllp.com
