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The philanthropic way to sell your business
Specialist lawyer Tracey Dickens, partner at Tees Law, explains how setting up an Employee Ownership Trust allows a business owner to sell their shares directly to their staff and see the business thrive W hen business owners start to think about retiring or moving on from their company, they
typically sell their shares to a third party or management team at the going market rate. However, there’s a tax-efficient alternative to consider instead, wherein they sell a controlling interest in their shares to their staff instead, through an Employee Ownership Trust (EOT). “EOTs were introduced by the Finance Act (2014) to promote employee ownership of businesses,” explains Tracey Dickens, specialist lawyer and partner at Tees Law. “They were devised as a means of diversifying the economy by allowing business owners to sell their shares to an employee-owned trust, free from capital gains tax (CGT), with tax relief on staff bonuses of up to £3,600, both subject to a number of conditions being maintained. “With the autumn 2024 budget’s rise in CGT, we anticipate EOTs will become increasingly popular. They’re suitable for a variety of companies and succession planning scenarios.” Conditions If this all sounds a bit too good to be true, it’s important to note that EOTs are bound by strict conditions. “If the conditions are breached, in most circumstances the tax benefits are lost. As regards the CGT liability, whether the seller or the EOT suffers the consequence of this will depend on when the disqualifying event occurs. It can mean the seller becomes liable for their CGT relief being clawed back,” says Tracey. “The autumn 2024 budget extended the period during which the seller is at risk from one to four years, so there’s a longer period of time where the seller potentially remains liable for CGT on the transaction.” Conditions include that it must be a trading company; any share distribution from the trust fund or bonus payment must be for the benefit of all employees, on the same terms; the owner must transfer more than 50% of the ordinary share capital and voting rights to the trust and the trust must
be entitled to more than 50% of the assets should the business be wound up. Other conditions apply, but a properly established EOT will ensure that all these conditions are met and, as far as possible, include controls to prevent a disqualifying event. It is in the seller’s and employees’ interest that the conditions are maintained. Why set up an EOT? “Setting up an EOT is about business succession,” says Tracey. “The owner might not have a management team or family ready to succeed them, and a trade sale isn’t practical or financially viable. An EOT works best when you’ve got a philanthropic seller keen to benefit their employees. What they’re doing is giving their controlling interest to a trust, held for
For more information, contact Tracey Dickens teeslaw.com/our-people/tracey-dickens without ever having to put a hand in their pocket, the employees end up owning all, or a controlling interest in, the business,” says Tracey. “It means that one day they can benefit further from the profits of the business, or if a third-party sale becomes viable then all those employees would benefit directly from the sale.” the benefit of all employees. The company keeps trading and uses its profits to pay the trust, in turn paying off the business seller. “Eventually, through the trust and
A properly established EOT will ensure all these conditions are met and prevent a disqualifying event
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