With businesses over the last few years feeling the impact of employee turnover, increased employee costs and difficulty in trying to achieve succession or exit, more and more companies have been turning to Employee Ownership Trusts. The key benefit of an Employee Ownership Trust is that from an exit point of view a business owner can sell part or all of their business to the Trust and can control the terms and remain within the trading company following the sale. One great advantage is that the sale is free of capital gains tax which is an enormous incentive especially having regard to the fact that the entrepreneur’s relief limit is now limited to £1m per individual. Another major attraction is the fact that it provides greater employee engagement and commitment and in the long run it has been proven that there is improved business performance. Companies controlled by Employee Ownership Trusts are also able to pay tax free cash bonuses to their employees of up to £3,600 per employee per year.
An Employee Ownership Trust works on the basis that the existing shareholders sell at least 51% of their shares to the Employee Ownership Trust which are then held for the benefit of the employees. The Trust pays for the shares at market value and can either pay an accelerated lump sum amount or can pay over a number of years dependant on the cash available within the company and the cash flow of the business. Once the consideration for the shares has been paid in full the shares are owned for the benefit of the employees.
To recap, the main advantages of selling shares to an Employee Ownership Trust are:
- allows shareholders to sell their shares for full market value and no capital gains tax is payable;
- allows employees to indirectly benefit from the success of the company;
- directors can remain in the business post transfer and can continue to receive market rate remuneration packages; and
- the Employee Ownership Trust is seen as a friendlier model and allows for confrontation and negotiation to be reduced which in turn should lower adviser fees.
There are qualifying conditions for the Employee Ownership Trust but in the main many trading companies can benefit from the use of an Employee Ownership Trust.
What to do next
If you do wish to explore the benefits of an Employee Ownership Trust and how this may assist you in exit, succession and incentivising employees then please feel free to contact us and we would be happy to explore this with you.
10 October 2022