1st July 2021
Whilst the new Mrs Johnson may not be a fan of their furniture, the Government continues to encourage more companies to follow the ‘John Lewis model’ of increased employee ownership. This encouragement comes in the form of the Employee Ownership Trust (EOT) which provides generous tax breaks to shareholders who sell their shares to this specific form of employee benefit trust.
The model works as follows:
- The company forms an EOT
- Shareholders sell their shares to the EOT for full market value
- The purchase price is initially left outstanding as a debt from the EOT to the shareholders
- As the company generates profits, contributions can be made by the company to the EOT
- The EOT uses these contributions to repay the shareholders, so the sale is ‘self-funded’ from future profits
Why would shareholders want to do this rather than seek a standard trade sale?
- A controlling interest can be sold to the EOT free of CGT, IHT and Income Tax
- It allows employees to indirectly own the company without having to fund the purchase personally
- The selling shareholders can receive full market value for the shares which is fixed at the start rather than having to rely on any ‘earn out’ clauses
- The sale process is likely to be quicker and more straight forward than a third-party sale
- The directors can remain in post after the sale and continue to receive a market rate remuneration package
- Greater employee engagement and drive to grow the company
- The EOT can pay tax free bonuses to all employees of up to £3,600 per year
As you would expect, there are conditions that must be met by the company and the EOT. These include:
- The company must be trading or the holding company of a trading group
- The EOT must hold at a least a 51% controlling interest in the company
- The number of continuing shareholders who are directors or employees of the company must not constitute more than 40% of the total number of employees
- The application of the trust’s property (the shares) must be for the benefit of all employees on the same terms, although benefits can be linked to remuneration, length of service and hours worked
If you think the EOT model would work for your business, please contact me or speak to your usual haysmacintyre contact for help and advice.