Considering a company sale? There’s a solution you ought to consider.

If you're looking for a way of achieving full value for your business, it's worth investigating an Employee Ownership Trust, writes ANEES HUSSAIN of our tax department. There are many advantages to this tax-efficient method of disposing of a company.

With these times of rampant price increases and uncertainty within the markets, many small business owners may have considered a sale of their company to realise some much-needed funds. This article will illustrate a tax-efficient method of disposing of your business that can protect the employees and enable you to achieve full value for your company.

What is an Employee Ownership Trust?

An EOT is best described as the John Lewis model of structuring a company. This is where, essentially, a trust will own shares in the company and will run the business for the benefit of the employees. EOTs can be set up by the current owners as part of their retirement or exit strategy.

The main tangible benefits of this method of disposal include:

• Management being able to continue running the business effectively, as the EOT allows the shareholders to fast track a smooth transfer of the company to the employees.
• Shareholders receiving full value for their business.
• The workforce being empowered and incentivised to take the business to the next level.
• Lower transaction costs compared to a traditional sale on the open market.
• Potential for a full capital gains tax relief provided the disposal meets the qualifying criteria for an EOT.

How does it work?

Firstly, an EOT would be established, with trustees assigned to the running of the company.

The existing shareholders would then dispose of their shares by selling them to the Trust under what is known as a share purchase agreement. It is here where the shareholders and the Trustee company would interact with a relevant expert to value the company – it is this value which will be used to ascertain the purchase price.

When the shares are sold, the purchase price will mean there is a debt owed by the EOT to the existing shareholders that will remain outstanding.

The company will continue as usual to generate profits yearly, and it is these profits which will be used to make contributions to the EOT. Such contributions will be used to service the debt created by the outstanding purchase price owed to the original shareholders.

Advantages

• Employees do not need to use their own funds to buy the company.
• Shareholders can sell the shares and realise full market value (the only caveat to this is that an independent valuation will be needed).
• Not all shareholders are required to dispose of their shares to the EOT.
• No capital gains or income tax issues would arise on the disposal of shares to an EOT.
• There will be greater employment commitment to the firm and improved business performance.
• Tax-free bonuses of up to £3,600 per year are available to employees where the company is controlled by an EOT.

Does your company qualify?

There are certain conditions that must be met to qualify for the EOT tax exemptions, which are:

• The company in which the shares are transferred must be a trading company.
• The shares must distribute to all eligible employees on the same terms.
• The trustee must retain a minimum of a 51% controlling interest in the business.
• The number of shareholders that continue to hold their shares who are directors/employees must not exceed 40% of the total employees of the business.
• Trustees may differentiate between employees when offering the shares based on remuneration, length of service and hours worked.

At Page Kirk we have a dedicated team of accounts specialists and tax advisors who can assist and advise you on such matters to help maximise the value of your business and support you in the long-term on the planning strategies that you wish to fulfil. So why not get in touch by calling us on 0115 955 5500 or emailing enquries@pagekirk.co.uk