EOT

This is still a relatively new concept, introduced by George Osborne, as an alternative exit mechanism for certain owner managers who do not want to “sell out” to a large entity. We have direct experience advising on this structure and for the right set of circumstances it should be considered. We can also refer you to a specialist law firm with whom we would work on the project.

OVERVIEW:

• Not so much a share scheme for employees but rather an exit strategy for the founders which also provides longevity and security for the business and its employees.

• A sale of a controlling shareholding in the company is broadly required.

• The “buyer” is an Employee Ownership Trust (EOT) which the employees can benefit from.

• Can be funded from profits/working capital over a suitable “deferred” period or external lender.

• Lends itself to a “realistic” valuation that the owner is happy with.

• As the sale price will ultimately be funded from company profits, application for HMRC tax clearance is recommended to minimise risk of the payment to the outgoing founder(s) being taxed as income.

• Selling all the founder’s shares is likely to work better in the long run.

• The legal documentation can ensure that founder(s) still retain some “control” after the sale to the EOT and measures can be put in place to make it difficult for the trustees to ever sell the company.

Main tax benefits:

• When the owners sell to the EOT they pay no Capital Gains Tax (CGT).

• Annual tax-free bonuses (but NIC due) available for employees (currently £3,600).

The main pitfalls:

• The EOT as an exit vehicle needs to be planned well in advance with the employees (experience suggests at least two years) to obtain everyone’s “buy in” to the process.

• A number of detailed conditions, such as “all employee” related requirements, must be fulfilled to enable the favourable CGT treatment for the vendor(s).

• Many conditions after the sale must continue to be met, otherwise the CGT charge could be clawed back and levied on the Trustees. The vendors also need to be careful in the initial post-sale period.

• Some restrictions on employees benefitting from the trust if they are already a shareholder.

(The above is based on legislation currently in force and is not to be construed as formal tax advice).

At RS we specialise in helping owner managers achieve what's right for them and their business, no matter what route they decide to take. For more articles on business tax see here or book a free consultation with our tax director Jon Miles. Or call Jon on 01225 325580 or email JM@richardsonswift.co.uk