Employee Ownership Trusts and tax incentives for UK companies
Since 2014, UK Government tax incentives for employee ownership trusts (EOT) have added to the interest in employee ownership. The tax incentive, an exit without incurring any capital gains tax liability, is available to the owners of trading companies who sell shares to an Employee Ownership Trust. Of course to qualify a sale must meet certain qualifying conditions which I comment on below.
For those interested in statistics, employee owned businesses which are totally, or significantly, owned by their employees account for around 5% of UK GDP annually. Successful Employee Ownership Trust led businesses in the UK include Arup, John Lewis Partnership, Mott MacDonald, Richer Sounds as well as 100s of companies nationally and internationally.
In 2018 an independent, business-led, panel inquiry report on Ownership Effect under the auspices of the Employee Ownership Association took evidence from more than 100 UK businesses. It concluded what some have known for a very long time, namely that employee ownership is a strong and viable alternative to a trade sale or management buy-out and a means to support the successful transition of business ownership from one ownership group to the next.
Employee Ownership Trusts – conditions for beneficial UK tax treatment
In summary they are:
- The company whose shares are transferred has to be a trading company or the principal company of a trading group
- The Employee Ownership Trust must have trustees who must restrict how settled property (the shares) are applied for the benefit of all eligible employees and on the same terms
- For the Employee Ownership Trust to retain its beneficial tax status, the trustees must retain, and on an ongoing basis, at least a 51% controlling interest in the company
- The number of continuing shareholders (and any other 5% participators) who are directors or employees (and those connected to such employees and/or directors) must not exceed 40% of the total number of employees of the company or group
- Trust property (e.g. the shares in the company) must be applied for the benefit of all eligible employees on the same terms but the trustees are permitted to distinguish between employees on a basis that is linked to remuneration, length of service and hours worked.
Almost any type of business can be part of an Employee Ownership Trust based ownership structure in the UK. Inevitably, this is an evolving area and the need for professional advice is recommended.
In my next blog I will address what are the key advantages of selling to an Employee Ownership Trust and the advantages for the company and its employees. The tax incentives are not one sided and the benefits for the company and employees are an important feature and incentive for the business going forward.
Tim Sadka is a Partner in Rix & Kay’s Corporate Team. With more than two decades’ experience both as a corporate lawyer and in business leadership and management roles, Tim has a proven track record of leading project teams to help businesses realise and deliver their strategic objectives.
The Rix & Kay corporate team has the resources to support Employee Ownership Trust transactions and has strong working relationships with tax, accountancy, corporate finance and business communications practitioners who are themselves well placed to offer support on a collaborative basis.