Helping you prosper

Thinking outside the box

28 July 2020

In the current challenging times, many company shareholders who might otherwise have decided to sell their shares have either put their plans on hold or are simply fighting fires. Their attitude understandably is that they will wait to sell until times improve. There are, of course, those companies which have either weathered the storm or indeed prospered.

An alternative for shareholders wishing to sell their shares but feel they currently are unable to (or don’t want to) sell to a third party, does exist and is worth considering. This is the establishment of an Employee Ownership Trust (EOT).

In the 2014 Finance Act, legislation was introduced which provides tax reliefs on the setting up of an EOT. Essentially, the existing shareholders of the company sell at least 51% of their shares to a newly formed trust (the EOT). The EOT acquires the shares from the exiting shareholders and holds them for the benefit of the employees of the company. The shares sold by the exiting shareholders are Capital Gains Tax free and payments made by the company to the EOT can also be made tax free. All employees must benefit on an equal basis and can receive cash bonuses of up to £3,600 free of tax each year.

The value of the company/the shares being sold is established by means of an independent valuation. Funding for the transaction is by means of a debt created between the EOT and the exiting shareholders.

This solution is attractive to businesses where the shareholders don’t want to (or can’t) sell to a third party, but nonetheless want a full or partial exit. The Directors of the company in question can stay in place after the transaction and continue to receive remuneration.

Not all companies can avail themselves of this option, it does not apply to companies which are not trading companies or the main company in a trading group.

The EOT represents a solution for qualifying shareholders who feel ‘marooned’ in the current environment and does not involve third parties so represents a very attractive alternative.

Our corporate finance and taxation teams are experienced in advising owner managed companies on matters such as this. Please contact me or your usual UHY adviser should you wish to discuss this further or get in touch via our contact form.