Advantages:

For the current shareholders:

• Shareholders can realise the value built up in the business; and consideration will generally reflect the market value of the shares.
• Generally no capital gains tax on disposals to a qualifying EOT, subject to the relevant requirements being met.
• Process can be funded in a tax efficient way out of the accumulated and future profits of the companies.
• Structure provides flexibility for the vendors to remain involved in the business, which can help with the transition of ownership.
• Shareholders can potentially retain a minority shareholding in the company, albeit the existence of the EOT shareholder may adversely affect the value of residual shareholdings (as across).
• Can provide a means to exit in situations where there are limited external options available.

For the business and employees:

• Employee ownership can be rewarding for staff, and can provide better protection for staff than would be the case in a trade sale.
• The legacy, core values and culture of a business can be protected.
• Profits can be reinvested or shared amongst employees.
• Tax free bonuses of up to £3,600 (per person per annum) can be paid to all employees, and surplus profits remain available for reinvestment or distribution amongst employees.

Limitations:

• Consideration will generally be payable to the shareholders over a number of years.

• Consideration will generally be paid out of the accumulated and future profits of the company, which can place strains on company cash flow.

• Company needs to have a suitable operating infrastructure and management structure to ensure the business can continue to operate effectively, even after the sellers have exited.

• Certain conditions must be met in order to qualify for the relevant capital gains tax reliefs, and these must be met for 4-5 years after the transaction, and indefinitely thereafter (see below).

• It is generally challenging (or expensive) unwinding an EOT structure, given the high burden of tax that will often arise in that scenario.

• The value and marketability of any shares retained by the vendors or other individuals may be reduced.

• EOT itself does not necessarily provide a means to incentivise specific employees and so supplemental arrangements will need to be made (for example, targeted bonus or other incentive schemes), which can add complexity into the structure.

In general terms, the process of implementing an EOT is as follows:

• The EOT is established by the company; and
• The shareholders sell their shares to the EOT for consideration which will generally reflect the market value of the shares and include:
  • An amount of cash payable at or around completion; and
  • An amount of cash consideration payable over an extended period.

In some cases, the company makes an initial contribution of funds to the EOT, and will make further contributions over time, which are used to repay the outstanding purchase price. In some cases, the trustees or company may choose to borrow (from a third party) to expedite payments to the vendors

• The company must be a trading company or the holding company of a trading group

• The EOT must obtain control of the company.

• The EOT must be tax resident in the UK

• The number of shareholders who are also directors/employees must be less than 40% of the total number of employees

• The trust must be established for the benefit of all employees, on terms that must be broadly equal, except that certain former shareholders and their relatives must be excluded. The trustees can distinguish and provide different benefits to employees based on remuneration, length of service and hours worked (and the companies can continue to remunerate employees, on a commercial basis, as appropriate), but otherwise any benefits must be on equal terms

• The trustees must take all reasonable steps to ensure that the consideration does not exceed market value, which as a minimum, will generally warrant an independent valuation being obtained

• The vendor shareholders must not control the trustee board or the companies

• The relief is only available to individuals, and does not apply to companies

• The shares must be ordinary shares, and the individual must not have claimed relief in respect of any prior disposals of shares in the same company

Initial Feasibility Analysis

• Advising on the appropriateness of employee ownership for your business, or where relevant, we can also advise on any alternative succession strategies that might be relevant to achieve your objectives.
• Assessing the feasibility of selling shares to an employee ownership trust.
• Financial modelling and forecasting.
• Advising on governance arrangements, business strategy, systems and processes, and working with you generally to ensure that the employee ownership model is viable and sustainable.

Planning and Structuring

• Tax structuring advice, designing the process and preparing a steps plan.
• Alongside our other specialist teams, advising on business valuations and financing strategies.
• Coordinating with HMRC to obtain any relevant clearances.
• Advising on supplemental employee share schemes and/or other incentivisation strategies, as relevant.

Implementation, Communication and Reporting

• Providing transactional support, review of legal documentation from a tax perspective and working with any other advisers to implement the transactions.
• Assisting with communication to key stakeholders and employees.
• Dealing with associated administration, reporting, disclosures, elections and relief claims.
• Providing practical, commercial and technical input to support in the implementation of complex transactions.
• Accounting for EOT transactions, and assisting with any associated reporting requirements in respect of the companies, the trust and the vendor shareholders.