3 minute read
Employee ownership trusts
Rodney Sutton, Advisory and Assurance Partner, and Head of Manufacturing and Tim Levey, Chairman at Kreston Reeves
EMPLOYEE OWNERSHIP TRUSTS Are they right for your business?
The last 15 months have shown us that however much we plan, sometimes we are thrown a curveball. However, that doesn’t mean that we shouldn’t plan or ignore the future.
There are lots of options to consider when creating the best succession plan for your business, including identifying future leaders, empowering and retaining them or a change of ownership. Each route will have its own advantages, complications and tax consequences. In our experience, the most effective succession is carefully thought through with a clear and far-sighted roadmap. You could: n Start a talent management programme to develop individuals who are important to the organisation n Offer a share option scheme to encourage the retention of key managers n Establish an employee ownership trust to help employees own shares within the business
n Consider whether a management buyout is an option n Decide whether there’s a family member capable of assuming a leadership role in the future n Investigate selling the business to an external buyer
Below we explore Employee Ownership Trusts (EOT).
EOT – IS THIS AN EXIT ROUTE THAT BUSINESSES OWNERS SHOULD BE CONSIDERING?
Many business owners and professionals were expecting the government, in its March 2021 Budget, to make sweeping changes to the capital gains tax legislation. As a result, strategies for company share disposals were aimed at completing prior to this date. There was a collective sigh of relief when no significant changes were announced. However, it is widely acknowledged in professional circles that this is a temporary reprieve and that changes including increases to the capital gains tax liabilities on company share disposals are still very likely.
Furthermore, many business owners acknowledge that their employees are their greatest asset, and are concerned that in a conventional trade sale, long standing and loyal members of the workforce could be laid off by the new owners wishing to cut costs and maximise the return on their investment.
WHAT ARE THE MAIN REQUIREMENTS TO QUALIFY?
The qualifying criteria include: n Standalone trading company or parent of a trading group. n Trustees of the new EOT must restrict application of the shares for the benefit of all eligible employees on the same terms. n The trustees must always maintain at least 51% control of the eligible company or group which means that the selling shareholder must sell a controlling interest. n The number of continuing shareholders who are directors or employees, or any person connected to them, cannot exceed 40% of total employees of the company or group.
Although application of the shares must be on the same terms to those eligible employees, there is the opportunity for trustees to distinguish eligible employees on basis of length of service, remuneration levels and hours worked.
EOTs are an alternative that have some very attractive advantages both from a tax perspective and from a potential readymade succession option. However, there are risks to the sellers as their purchase price settlement remains dependent on market sustainability, future profits and cash flow.
There is a situation which is prevalent in many SME businesses where the owner is nearing retirement, there are no immediate family successors and management does not have the funds available for a potential management buyout.
Is an EOT a viable alternative in the above scenarios?
EMPLOYEE OWNERSHIP VIA EMPLOYEE OWNERSHIP TRUSTS
EOT legislation was introduced in 2014, allowing for the sale of company shares by shareholders to their employees with generous tax advantages to the sellers. Basically, there is no tax to pay on the proceeds.
Employee ownership contributes 4% of UK GDP annually as stated by the Employee Ownership Association. Most people are aware of the John Lewis Partnership as a significant and pioneering example of businesses successfully owned under this model. This is a move that would benefit from early planning and strategising.
At www.krestonreeves.com we will be exploring other options to give you inspiration on how to develop a succession plan for your business.
