Tax Advantages Of Selling To An Employee Ownership Trust

Jonathan Lea November 13, 2024

Introduction

When it comes to selling a business, tax implications are a significant concern for owners. Fortunately, selling to an Employee Ownership Trust (EOT) offers substantial tax benefits that can make this exit strategy particularly attractive. In this article, we dive into the key tax advantages of EOTs, highlighting why they are a popular option for business owners looking to exit while maximising their financial returns.

1. Capital Gains Tax (CGT) Exemption

One of the most significant tax benefits of selling to an EOT is the complete exemption from Capital Gains Tax (CGT) on the sale proceeds. This means that business owners can sell their shares to an EOT at full market value without incurring a CGT liability. For many owners, this can result in substantial tax savings, especially when compared to selling shares through traditional third-party deals, where CGT can reach up to 20%.

2. Tax-Free Employee Bonuses

Under the EOT structure, businesses can pay tax-free bonuses to employees of up to £3,600 per person per year. This not only acts as a powerful incentive for employees but also contributes to a more engaged and motivated workforce. By distributing profits in this tax-efficient manner, companies can enhance employee loyalty and satisfaction, which in turn can drive business performance.

3. Corporation Tax Relief on EOT Contributions

Businesses that transition to employee ownership can also benefit from Corporation Tax relief on contributions made to the EOT. This tax relief can be claimed on payments made to fund the acquisition of shares, effectively reducing the overall tax burden for the company. It allows businesses to use pre-tax profits to repay any financing used to set up the trust, thereby improving cash flow management.

4. Inheritance Tax (IHT) Considerations

Selling to an EOT can also provide Inheritance Tax (IHT) planning opportunities. Shares held by an EOT are not considered part of the seller’s estate for IHT purposes, which can be beneficial for owners looking to pass on wealth to future generations. By utilising the EOT structure, business owners can reduce their IHT liability while ensuring that the company remains in the hands of trusted employees.

5. Deferred Consideration and Tax Efficiency

In many cases, the purchase price for shares sold to an EOT can be structured as deferred consideration. This means that the payment to the seller can be spread over several years, funded through the company’s future profits. Such an arrangement can improve the tax efficiency of the transaction by spreading out tax liabilities over time, while also providing financial stability for the business post-sale.

6. Simplified Exit Process with Lower Tax Liabilities

Compared to other exit routes, selling to an EOT involves fewer legal and financial complexities, which can reduce overall transaction costs. By opting for an EOT, business owners can benefit from a smoother sale process with fewer tax-related complications, ultimately leading to a more financially advantageous exit strategy.

Conclusion

The tax advantages associated with Employee Ownership Trusts make them an attractive option for business owners looking to maximise their financial outcomes during an exit. From CGT exemptions to tax-free employee bonuses, the EOT model offers a range of incentives that benefit both sellers and their employees. If you’re exploring tax-efficient exit strategies, selling to an EOT might be the right choice.

To learn more about how the team at The Jonathan Lea Network can assist with your EOT transition, get in touch today.

How we can help

If you require help, we offer a no-cost, no-obligation 20-minute introductory call as a starting point and in some cases where appropriate, a fixed fee appointment.

Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible. After this call, we can then email you a scope of work, fee estimate, and confirmation of any other points or information mentioned on the call.