Succession Planning: Employee Ownership Trusts
Employee Ownership Trusts (EOT) are a tax efficient way to pass on ownership of your company to your employees. They are attractive to owner managed businesses where the driving force behind the business wants employees to benefit, doesn’t have a chosen successor and is uncomfortable with a sale to an unknown third party.
How does it work?
The owner of shares in a business puts them into trust for the benefit of the company’s employees. This means that while legal title to the shares is held by the trustees, the benefit of the shares (for example, dividends) are paid into the EOT and, ultimately, used for the benefit of the employees of the business.
How is it funded?
The employees do not pay for the shares nor does the trust immediately pay for the shares. The purchase price of the shares is usually left as a debt from the trust to the outgoing shareholder. The debt is repaid from future profits of the business.
What are the benefits?
The future owner provides for the employees of the company. Founding directors and shareholders who have spent their lives building a successful business have the comfort of a managed succession to known and trusted successors.
There are also three main tax reliefs, which, if you are considering setting up an EOT you should speak about in more detail with your accountant or tax adviser. However, in summary, the sale to the trust can qualify for 50% capital gains tax relief. There may be an ability to pay annual tax-free bonuses to employees. Plus, there are certain inheritance tax reliefs.
What’s the downside?
The purchase price of the shares generally sits as a debt from the trust to the outgoing shareholder. This means that an EOT should be carefully costed and planned to be as sure as possible that the company can manage the debt.
It might seem obvious, but the outgoing shareholder will no longer be entitled to dividends on shares and will not, even as a trustee of the EOT, have the same level of control and say over the running of the business. This can come as an unwelcome realisation to some outgoing founding shareholders as they are so used to running the business in their way.
Final comments
There are various qualifying criteria to be an EOT. You should speak to your accountant or financial adviser to understand more about how it affects your tax position. When you are ready to put your legal framework in place we will be glad to help.
To discuss Employee Ownership Trusts please call Victoria Spellman on 01473 350573, email [email protected] or fill out our enquiry form below.
Victoria Spellman is a Partner in the Company & Commercial Team at Barker Gotelee Solicitors.
