When you run a business, you know that it can take time to build the right team around you. So, when you have that team in place, you want to hold on to them.

Offering your employees shares in the business can be an effective way to help retain their talent and skills and increase their commitment to its success, while also minimising potential tax penalties for the transfer of shares.

The employee ownership trust (EOT) structure is a form of employee ownership – similar to that operated by the John Lewis Partnership – offering a highly tax-efficient succession option for business owners, as well as financial benefits for employees.

Very simply, under an EOT, a controlling interest in a company is held in a trust, which must operate on behalf of all employees.

Income tax and National insurance benefit

Bonus payments made from employers to their employees are subject to National Insurance and income tax at an employee’s regular marginal rate, which could be up to 45 per cent.

However, EOT controlled companies can make qualifying bonus payments of up to £3,600 per employee per tax year that are free of income tax.

To qualify the following conditions must be met:

• The bonus cannot consist of regular wages or salary; and
• All employees must be eligible to participate in the bonus scheme.

Tax benefits of a sale through EOT

Subject to certain conditions being met, the sale of a controlling share interest in the company to an EOT is exempt from Capital Gains Tax (CGT), providing even more attractive tax benefits than the ten per cent CGT rate payable Business Asset Disposal Relief.

For this generous relief to apply, the following condition must be met:

• The company whose shares are transferred to the EOT must be a trading company or the holding company of a trading group
• The EOT must not hold a controlling interest in the company before the transfer but must hold a controlling interest at the end of the tax year after the transaction occurs
• Benefits to employees must be on the same terms for all eligible employees and can only be allocated at differing amounts based on agreed factors such as salary, seniority or length of service
• The number of continuing shareholders who are directors or employees, and people connected with them, must not exceed 40 per cent of the total number of employees.
• Alongside these benefits to business owners, Inheritance Tax Relief is also available on certain transfers into and out of EOTs.

Our tax specialists are experienced in advising owner-managed companies on Government-approved share and option schemes.

If you are considering the sale of a business and think this may offer an effective alternative you should seek professional advice.

For more information on employee ownership trusts and other employee ownership schemes, please contact us.