If you are reading this article, you are probably considering selling your business to an Employee Ownership Trust (EOT).
Whilst selling a business into an EOT is certainly an attractive alternative to a traditional sale (not only for its tax advantages but also positive impact on the employee culture and the local community), there are certain criteria which must be met from a legal perspective in order for your business to qualify for this method of sale. Here is a brief summary of the key criteria that you should consider:
- Qualifying Company: Your company must be a trading company or the principal company of a trading group.
- Trust Structure: The EOT must be established as a discretionary trust, meaning the trustees have discretion over the distribution of benefits to employees. Under the legislative revisions which have been recently proposed by the Government, it will also become a requirement that the trustees are UK residents at the time of disposal.
- Sale Price: The trustees will also have to take reasonable steps to ensure that the consideration paid to acquire the company shares does not exceed market value.
- Controlling Interest: The EOT must acquire and hold a controlling interest in the company, which generally means more than 50% of the ordinary share capital and voting rights.
- All-Employee Benefit: The trust must be operated for the benefit of all employees on the same terms, although it can exclude employees with less than 12 months of service.
- Limited Participation by Former Owners: Former owners who sell their shares to the EOT can continue to be involved in the business, but their participation in the trust’s benefits must be limited. Once you sell your shares to an EOT you cannot continue to have control over the business!
These criteria ensure that the transition to employee ownership is genuine and benefits the workforce broadly, rather than just a select few. If the criteria are met and the transfer process is carried out correctly from a legal perspective, you are able to benefit from Capital Gains Tax relief on 100 per cent of the sale price for the shares to the EOT, and the company is able to pay tax-free bonuses of up to £3,600 per annum to each eligible employee.
Considering Employee Ownership? We’re Here to Help
Transitioning to employee ownership is a transformative journey, and determining your company’s eligibility is the first step toward reaping its many benefits. As an employee-owned company ourselves, we have firsthand experience of the rewards this model brings, from fostering a collaborative culture to driving long-term success. If you’re exploring whether employee ownership is right for your business, we’re here to guide you. Contact our team today to arrange a consultation and start your journey toward a more inclusive and sustainable future. You can call us on 01244 312306 or Contact Us and we’ll be in touch.
