By Elaine Wilcox, restructuring and insolvency consultant, Armstrong Watson
If you’re looking to pass on ownership of your company you might want to consider setting up an Employee Ownership Trust (EOT).
EOTs allow business owners to sell their shares to an employee-owned trust free from Capital Gains Tax (CGT).
This form of business ownership results in the majority of the company’s shares being owned by the trust and gives employees a controlling interest.
What are the advantages of an EOT?
- It allows an alternative exit route for situations where there is no obvious third-party purchaser.
- The owner can retain some involvement (up to 49 per cent). One advantage from their perspective is that the disposal of shares to an EOT is free of CGT for UK individuals if the transaction is structured correctly.
- From an employee point of view, there is a tax relief that allows an EOT to pay annual bonuses of up to £3,600 per person income tax-free (but still subject to NI).
- When employees are involved in the ownership of a company there is a mental shift that helps to drive success. Employees are more heavily involved, and it is shown to reduce absenteeism too.
What are the disadvantages of an EOT?
- Owners will not always receive all the money for the sale immediately. Often they will receive a portion upfront, this amount being funded by existing cash reserves in the company or through utilising existing bank facilities and/or by taking out new bank borrowings – either in the name of the company, or more likely the EOT with a guarantee provided by the company or, in some instances, the former company owner. Any remaining consideration would be paid to the owners on a deferred basis over a number of years with funding being provided by the company. There are clearly risks involved in selling shares to an EOT.
- It’s not always easy to determine the value of the business. It is important the owners and the trustees of the EOT agree on a fair market value for the company which is affordable for the EOT, and indirectly the company. Servicing too high a price can potentially put too much strain on the working capital of the company. A lack of working capital to reward employees because of the high loan repayments can work as a disincentive.
If you are considering selling your business to an EOT, it’s important to carefully consider the potential advantages and disadvantages. It’s also important to make sure that you have a good understanding of the current economic climate and how it’s affecting EOTs.
