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Technical updates // 18/02/2015

Is An Employee Ownership Trust Right For Your Business Succession

Succession planning can be a problem for business owners. Children have their own career plans, which rarely involve taking on the family business, and it is not always possible to find a suitable trade buyer. The other traditional option has been the MBO. But selling the company to the current management is not as straightforward as it once was. Like so many in the squeezed middle, managers are more likely to be saddled with debt than have spare cash lying around.

So when all the usual options have been exhausted, a more radical solution is called for. Employee ownership trusts are a neat, modern solution for succession planning. The credit crunch cast doubt over many current business models. But one organisation – the John Lewis Partnership – seemed to sail steadily through the recession while all around were struggling to stay afloat.

The lesson was not lost on Government ministers, who saw the value of employee ownership, and last year introduced the Employee Ownership Trust. It can offer the win-win situation of sustainable business succession and better business performance from engaged, motivated employee-owners.

Employee owned company benefits

Most business owners feel a duty of care for their employees – many of whom have become more like family and friends. So if you like the idea of employee ownership, why not consider whether your company would benefit from being owned by the trustees of an employee trust on behalf of all its employees.

This is not about tax advantaged remuneration plans based on share ownership and options. This is about a fundamental shift in business model, and using it as a succession solution. That said, it does have a number of significant tax advantages. The idea is that an EOT is established and it buys the owner’s shares with the intention of owning them indefinitely for the benefit of the employees, although this is not a requirement. The purchase can be funded
by company contributions or borrowings either before or after the sale.

A specific exemption in capital gains tax legislation means that funds then flow tax-free to the owner. As a means of extracting wealth, this is more efficient than the use of Entrepreneurs’ Relief, which attracts a 10% rate of tax. Furthermore a tax exemption for employees means that they can enjoy a bonus of up to £3600 per tax year, free of income tax.

Of course, such significant tax breaks could be abused, so they come with detailed rules. Fortunately the qualifying conditions are clear and easily understood:

  • The EOT must hold a controlling interest of over 50% of the shares
  • All employees must benefit on an equal basis
  • There must be limited participation by previous shareholders.

 

So, if you are a business owner who is considering employee ownership and looking for an exit, this model of ownership and governance could deliver impressive commercial advantages. Importantly, it can also be implemented in a straightforward and tax-efficient way.

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