Are you an owner or shareholder of a company and looking for a way out of the door? The Employee Ownership Trusts (EOT), introduced in 2014 by the Government, may just be your free pass.
EOTs were introduced as a means of promoting employee ownership in the UK by offering a tax break to exiting shareholders. An EOT is a trust which is set up for the benefit of all the employees of a company or group of companies. The sponsoring company can make a contribution to the EOT and the EOT can use that contribution to purchase the shares from the exiting shareholders.
Provided a number of conditions are met, the sale of the shares to the EOT is treated as taking place on a nil gain/nil loss basis such that no Capital Gains Tax arises. Broadly, the company must be a trading company that is not a subsidiary, the EOT must obtain a controlling interest in the company as a result of the acquisition, the EOT must be for the benefit of all employees of the company or group (excluding shareholders) and shareholders that own 5% or more who are also office holders must not exceed 40% of the total of persons who are employees or office holders
An EOT works on an employee ownership model, giving employees greater engagement running the business, which in turn stimulates innovation and growth. When a shareholder or owner sells their company or part of it, to an EOT, the EOT becomes the new owner administered by a board of trustees, who act on behalf of the employees.
Hawsons have recently advised the shareholders of a local company selling to an EOT. To ensure the transaction was the most beneficial, Aaron Hemmington worked closely with the shareholders, essentially holding their hand every step of the way and ensuring they understood what they and the company were gaining throughout the process. Aaron’s tax expertise allowed him to consider all of the tax implications which were recorded in a final report summarising the benefits of the approach.
EOTs are becoming more and more popular and there have been high-profile users of this vehicle in recent years including the example set by Julian Richer of Richer Sounds who sold 60% of his shares to an EOT in 2019.
Aaron said: “Whilst the benefits are clear, working first hand with advising a shareholder on selling to an EOT gives an insight into various other commercial benefits an EOT brings the business. It was important that the company was passed to its employees as a means of both maintaining the company’s excellent culture and retaining its key employees. Had the company been sold to a third party this may have been lost. I feel that an EOT should be closely considered by anyone who is looking for the same or a similar outcome.”
Hawsons’ team of experienced corporate finance and tax specialists can help in determining whether selling to an EOT is the right fit for a business, along with supporting with structure, advice, valuations and legal completion of the sale.
Contact Aaron Hemmington, Tax Partner at Hawsons to discuss the benefits an Employee Ownership Trust on 01604 645600 or email aaronhemmington@hawsons.co.uk
