Employee Ownership Trusts – a brighter future for all? Cathrin Richards, partner at Azets
It's no empty cliché to say that the pandemic has changed priorities for many, including business owners who may be re-evaluating their work/life balance and accelerating plans for an exit.
For those willing to look beyond the conventional options of a sale or MBO there is an alternative which may also offer the opportunity to benefit a much wider group of people, by selling your company to an Employee Ownership Trust (EOT).
And the surprising upside is that with careful planning this can be done without paying any Capital Gains Tax! Cathrin Richards, Partner at Azets explains.
An EOT is a form of collective ownership, like the well-known John Lewis model. It works by setting up a special sort of trust, which then acquires shares in the company from existing shareholders and holds them for the benefit of all its employees. It is a form of indirect ownership which can flex as the composition of the workforce changes, avoiding the practical and administrative difficulties of issuing shares directly.
The idea is the business itself generates the funds needed to pay the previous shareholders for their shares over a period of time, by making contributions to the EOT. Unfortunately, these don't get tax relief - but that's effectively no different from an MBO.
It's good for employees as they get a stake in the business without having to pay anything, and the chance to appoint representatives to oversee the management of the company. There is a double incentive for them to remain with the business, through the prospect of sharing in the proceeds of a future sale and also by receiving bonuses of up to £3,600 a year tax free if things are going well.
An EOT transaction can also work well for upcoming management who are not ready to take the leap of faith and personal risk required for an MBO, as relatively small holdings of shares can be set aside for direct ownership as an added incentive for them alongside the EOT.
The business owner has a ready-made exit, without a time-consuming search for the right buyer. There is flexibility to choose whether to sell all or just some shares - it works as long as the EOT gets at least 51 % overall.
Careful planning to comply with HMRC's rules means no debate about how much Business Asset Disposal Relief you may qualify for, as there simply won't be any capital gains tax to mitigate. In short, everyone wins.
Employee ownership success
A number of our clients that have implemented EOT structures have seen benefits from the outset, both in measurables such as staff retention and also in less tangible ways, such as the goodwill generated and the positive perception of customers and suppliers.
What you need to consider
The successful transition to EOT ownership does however require careful planning and support. You need the advice of people who have been through the whole process from start to finish, and to be able to draw on specialists across a range of areas.
This is where Azets can help. From those initial discussions when deciding whether collective ownership is the right route for you and your business, you will progress to speaking to our valuation team to establish what you may be able to realise from the sale.
Once a price has been agreed, our Corporate Finance team can help with forecasting required to see how the business will generate the funds to pay for your shares, and a realistic timeframe over which this might be achievable. They will also be able to point you in the direction of our Banking & Finance colleagues if additional bank/asset-based finance is needed to speed things up.
To give you comfort over the tax treatment of the transaction, an advance clearance will be submitted to HMRC to iron out any queries that may arise with the proposed structure. Our Tax team will also work with you to identify the most tax efficient way to get shares to those critical to future success who may need an extra incentive - in many cases, the issue of an Enterprise Management Incentive (EMI) option can work well, as it is sufficiently flexible to be tailored for different individuals in a tax efficient way.
We will be able to recommend lawyers we work with regularly who are familiar with the specific type of trust, structure and documents required, and also help you to identify the best way of approaching the all-important employee communication piece.
It is difficult to overstate how crucial a part of the process of moving to collective ownership this is, and one size does not necessarily fit all. For some organisations, a formal consultation process may be needed, while others may already have informally established an appropriate ethos on which to build. Ultimately you will only be seriously considering this route if you genuinely have a desire for your employees to benefit, so it's worth investing the time getting their buy in from the outset.
Collaboration and communication at all levels is key to the successful implementation of an EOT. With careful planning and the right support throughout the process, the mutual benefits for all concerned can be considerable.
And while you won't be contemplating this for tax reasons, the prospect of paying no CGT certainly doesn't do any harm!
If the idea of collective ownership appeals to you, or you would like further information on any of the areas raised above, please contact Cathrin Richards.
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