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How to sell your business
Selling your business?
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Would you like your employees to own your business when you sell up? Pete Miller, Head of Corporate Tax at Jerroms Miller Specialist Tax, explains why an Employee Ownership Trust could be the ideal way forward
EOTs – Employee Ownership Trusts – are clearly continuing to grow in popularity, with the number of UK businesses becoming employee-owned doubling in just two years.
Last year was a record year for new EO businesses and, according to latest figures from the Employee Ownership Association, a further 118 joined their ranks in the six months to June 2022.
What is an EOT and why are more businesses choosing this succession planning route?
An EOT is a trust created entirely for the purpose of benefitting the employees of the business that it owns. It is also a tax efficient way of transferring control of your business to your staff because, as long as fairly straightforward conditions are met, the sale of the shares to the trust should be free of capital gains tax. EOTs are not designed for a quick sale, but if your planned exit includes measures that safeguard the longer-term future of your business and its employees, then they could be well worth considering.
Continued employee ownership is encouraged by Government; indeed, EOTs are one area of taxation which enjoys cross-party support. But there are issues you need to know about. For example, 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 liability and any surplus distributed to the employees will attract national insurance contributions and income tax.
And, what if one or more of the vendor shareholders stays on as a director of the company they have sold and a trustee of the EOT, potentially causing a conflict of interest? These areas need to be handled carefully and sensitively.
In such cases, we advise appointing other directors and trustees, usually at least one employee representative and someone independent, to make sure the vendor shareholders do not have control of the company after the sale. The Employee Ownership Association also recommends forming an Employee Council as part of best practice.
Finally, price is often an issue, as the trustees have a legal obligation not to pay too much for the shares. So it is important to have a robust valuation carried out by an experienced team.
Undertaking an EOT involves HMRC clearances, complex tax issues and looking at how the purchase of the business is financed. At Jerroms Miller Specialist Tax we have wide experience and expertise in advising on EOTs so we are here to help. Readers can email Pete Miller, Head of Corporate Tax on petemiller@jerromsmiller. co.uk or Nick Wright on nickwright@jerromsmiller.co.uk, for more information.
