Employee Ownership Trusts

are they for you?

When it comes to selling up and retiring, increasing numbers of business owners are considering the Employee Ownership Trust route. Tax expert Pete Miller from The Miller Partnership explains

An Employee Ownership Trust (EOT) is essentially a tax-efficient way of transferring control of your business to your employees and as long as some fairly straightforward conditions are met, then the sale of the shares to the trust should be free from capital gains tax.

In recent weeks, many owners looking to sell have contacted me about EOTs to see if they’re something they should be putting in place.

If you’re looking for a quick sale, then no, definitely not. But, if you want a planned exit that safeguards the longer-term future of your business and its staff, then an EOT is well worth looking at.

While they’re a great option for some, there are practical and policy issues that the Chartered Institution of Taxation is currently discussing with HMRC.

Government policy is to encourage long-term employee ownership, but what happens if the EOT’s trustees want to sell the business to a third party? Under the rules, this is discouraged by the tax implications, as the trustees will usually have a large capital gains tax bill and any surplus distributed to the employees will be subject to national insurance contributions and income tax.

To get around this, some advisers are encouraging owners to sell their businesses to an offshore EOT so trustees don’t have to pay UK CGT when they sell their shares. This circumvents the wider policy of employee engagement and is not what EOTs were intended for.

There are also governance issues, such as what happens if one or more of the vendor shareholders remain both a director of the company they have sold and a trustee of the EOT, which could potentially cause a conflict of interests.

In such cases, I encourage my clients to appoint other directors and trustees, usually at least one employee representative and one independent person, to ensure that the vendor shareholders do not effectively control the company after the sale. Setting up some form of Employee Council is also advisable – and is considered to be best practice by the Employee Ownership Association – although not all sellers choose to go that far.

There are other complex tax aspects to EOTs and several HMRC clearances will be required. We also need to look carefully at how the purchase is funded, so you’ll need professional tax advice. For help and guidance, Pete is available to advise when you email pete.miller@ themillerpartnership.com.

THERE ARE OTHER COMPLEX TAX ASPECTS TO EOTS AND SEVERAL HMRC CLEARANCES WILL BE REQUIRED