Succession planning ― employee ownership trusts (EOTs)

Produced by Tolley in association with Craig Simpson of Bates Weston Tax LLP
Succession planning ― employee ownership trusts (EOTs)

The following Owner-Managed Businesses guidance note Produced by Tolley in association with Craig Simpson of Bates Weston Tax LLP provides comprehensive and up to date tax information covering:

  • Succession planning ― employee ownership trusts (EOTs)
  • How does selling to an EOT work?
  • What are the advantages of using an EOT for succession planning?
  • Other considerations when using an EOT for succession planning
  • Ensuring full consideration paid out
  • Disqualifying events
  • Valuation of the shares
  • Inheritance tax
  • What are the implications for other share incentive schemes in the company?
  • How does the employee bonus scheme work?
  • More...

Where a controlling interest in a trading company is sold to an employee ownership trust (EOT) and the necessary qualifying conditions are met, there are capital gains tax reliefs for the seller and also the ability to pay bonuses free of income of up to £3,600 per year to employees. Therefore, using EOTs for succession planning can allow the owner of a business to pass on the company to the employees of the company for full market value without incurring a CGT charge. This method of sale can provide an alternative to external sales, management buy-outs or private equity backed buy-outs and may be more attractive given the reduction in the maximum amount of business asset disposal relief available from March 2020. This guidance note sets out the method of transferring to an EOT, the tax relief available and looks at some practical issues arising.

Detailed commentary on EOTs can be found in the Employee trusts ― implications of disguised remuneration and where are we now? guidance note and in Simon’s Taxes C3.1915.

HMRC guidance is set out at CG67800C onwards and the legislation is within TCGA 1992, ss 236H–236U.

How does selling to an EOT work?

In summary, a qualifying EOT is set up with a trustee and the shareholders in the trading company sell more than 50% of the current share capital to the EOT under a share purchase agreement for market value as determined by an independent valuer. The purchase price is left outstanding as a debt owed by the EOT to the vendor shareholders. The trading company will use existing reserves and future profits to make payments to the EOT and the EOT will pay the deferred consideration to the former owners over a period of time. Alternatively, the EOT could have third party debt financing to fund the initial payment to the vendor shareholders which allows the vendor shareholders to receive a proportion of the purchase price at completion. Care should be taken

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